The lira strengthened for the first time in three days, faring better than all the other emerging- and developed-country currencies except India, as the Turkish central bank continued to refrain from lending at its lowest policy rate for a second day.
The currency appreciated 0.3 percent to 1.8616 per dollar at 4:58 p.m. in Istanbul, the second-best among 31 major developing and developed market currencies. The lira has risen 1.6 percent against the dollar this year, the biggest gain after the Colombian peso among emerging-market currencies.
Turkey’s central bank withheld lending at its lowest annual funding rate of 5.75 percent for a second day, offering 5 billion liras ($2.7 billion) in one-week repurchase agreements at 10.86 percent. It did not provide liquidity at the minimum rate all of last week. Governor Erdem Basci has forecast inflation will fall to 6.5 percent by the end of this year from 11.1 percent in April, the highest in 3 1/2 years. Turkey’s April trade deficit beat estimates as the gap narrowed to $6.6 billion in April, contracting for a sixth month.
“The lira is one of the best performers year-to-date despite the large current-account deficit and the poor risk environment almost fully due to the central bank’s high interest rate policy,” Arko Sen, chief debt and currency strategist for emerging Europe, Middle East and Africa at Bank of America Corp. in London, said in e-mailed comments.
The central bank lent 4 billion liras ($2.1 billion) yesterday at 10.85 percent in its daily repo auction. It varies the policy rate daily between 5.75 percent and 11.5 percent within the so-called interest rate corridor which was introduced in October to defend the currency and curtail inflation.
Falling oil prices and rising exports signaled the current- account deficit may fall this year from $77 billion last year, a record high and the second-biggest gap in nominal terms after the U.S. Oil traded near the lowest close in seven months, heading for the longest weekly losing streak in 5 1/2 years. Turkey’s exports rose 7.3 percent to $11.8 billion in May from a year earlier, BloombergHT television reported, citing data announced by the Turkish Exporters Assembly in southern Antalya province today.
“We think that a 10 percent year-on-year increase in January-May 2012 when EU is in debt crisis and when EUR depreciated significantly against USD in year-on-year terms is still a success,” Ozgur Altug, chief economist at BGC Partners in Istanbul, said in an e-mailed note referring to exports.
The yield on two-year debt dropped 10 basis points, or 0.1 percentage point, to 9.35 percent, the lowest since May 3.
The central bank also provided 5 billion liras in its one- month repo auction it holds once a week on Friday against bids for 11.1 billion liras.
The total foreign-exchange reserve in Turkey has fallen from $85.9 billion in October -- when Basci introduced a flexible interest rates policy -- to $78.6 billion on May 25. Part of the reduction is down to the central bank selling dollars last year to boost the lira, which fell 18 percent in 2011.
The central bank is introducing a new mechanism to reduce the need for intervention in the foreign exchange markets, Basci said. It will gradually raise the amount of lira reserves banks may deposit in dollars to 60 percent from 40 percent, enabling lenders to deposit or withdraw foreign currency as per their requirements, the governor said in a speech in Ankara May 30.
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