Fears over U.S. ties limit Turkish lira gains after Fed decision

Turkish lira banknotes are seen in this picture illustration in Istanbul, Turkey August 14, 2018. REUTERS/Murad Sezer/Illustration

ANKARA (Reuters) - Fears over renewed tensions with the United States reversed some of the Turkish lira’s overnight gains in early trade on Thursday following a dovish Fed decision that had boosted emerging market currencies late on Wednesday.

The United States could soon freeze preparations for delivering F-35 fighter jets to Turkey, officials told Reuters, in what would be the strongest signal yet by Washington that Ankara cannot have both the advanced aircraft and Russia’s S-400 air defences system.

The lira firmed to 5.4160 against the dollar in the wake of the Fed decision but eased back to 5.4415 after Reuters report, analysts said.

Amid a slowing economy the Fed now sees only one rate hike next year, and announced a plan to end its balance sheet reduction program by September.

“It’s a very positive decision for emerging market currencies including the lira, and we were able to observe its impact on the market, with lira gaining around 1 percent against the dollar,” an Istanbul-based forex trader said.

“However, the report that ties with the U.S. are seen entering a difficult period was the only factor that limited this rise.”

The United States is nearing an inflection point in a years-long standoff with Turkey, a NATO ally, after so far failing to sway President Tayyip Erdogan that buying the S-400 Russian air defense system would compromise the security of any F-35 aircraft delivered to Turkey.

While no decision has been made yet, U.S. officials confirmed that Washington was considering halting steps now underway to ready Turkey to receive the F-35, which is built by Lockheed Martin Corp.

Reporting by Nevzat Devranoglu; Writing by Ece Toksabay; Editing by Dominic Evans