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The lira later trimmed some of its losses and bond yields rose as the central bank tightened liquidity to support the currency.
On Sunday, Turkish Foreign Minister Ahmet Davutoglu accused Syria of shooting down one of its military reconnaissance jets in international airspace without warning.
“The noises around it could be greater than the actual developments, but we remain wary of Turkish assets in the near term. In this respect, tomorrow’s meeting of the North Atlantic Council could be important to watch,” analysts at BNP Paribas wrote in a note.
By 0938 GMT, the lira stood at 1.8215 against the dollar , rebounding from 1.8245 earlier in the day but still weaker than a level of 1.8151 late on Friday.
Against a euro-dollar basket the lira traded at 2.0473, firming from 2.0504 late on Friday.
“This morning the lira was still trading weak as investors’ confidence was shaken after the media reports saying Syria shot down a Turkish jet on Friday,” said Erdinc Mogol, manager at the treasury marketing unit in Akbank.
“But it recovered after the central bank tightened lira liquidity. This move shows the bank would support the currency. The news about Spain also boosted the lira,” Mogol said.
The Turkish Central Bank injected 1 billion lira through a one-week repo auction, lower than 2 billion lira one-week repo maturing on Monday.
“Turkey’s response so far has been very restrained, which makes us think that Turkey will seek diplomatic sanctions through multinational channels, rather than acting unilaterally in a heavy handed manner,” said Finansbank chief economist Inan Demir. He said there seemed to be broad consensus among Turkish foreign policy experts that the incident does not constitute a casus belli, and that this view was shared by officials.
“Our baseline is that Turkey will seek a formal apology and indemnity from Syria, most likely through UN and NATO mechanisms, and refrain from responding “in kind.” Such a course of action should keep the fallout from the incident contained in terms of both political and market implications,” Demir said.
Spain’s Economy Ministry said on Monday the country formally requested European aid of up to 100 billion euros for its banks.
The yield on the two-year benchmark bond inched up to 8.91 percent, from a previous close at 8.80 percent. It had fallen to 8.78 earlier on Friday, its lowest since October 2011, on expectations the central bank would ease its monetary policy stance.
“The yields rose following the weakness of the lira. We expect intraday trade to stand between 9-8.80 percent,” wrote analysts at Halk Invest.
Istanbul’s main share index fell 0.61 percent to 60,091 points, in line with a 0.57 percent fall in the MSCI emerging markets index.
Turkish banking loan annual growth slowed to 20.9 percent as of June 15, from 21.1 percent a week earlier, data from banking watchdog BDDK showed on Monday.
After loan expansion of 34 percent in 2010 which was interpreted as a sign of overheating in the economy, the Turkish Central Bank decided to manage lira liquidity on a daily basis to reduce loan growth.
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