(Updates prices, adds comment)
By Ezgi Erkoyun
ISTANBUL, June 1 (Reuters) - Turkey’s lira weakened as much as 2.5 percent on Friday before trimming some of its losses in afternoon trade, with investors turning their attention to inflation data next week.
At 1548 GMT, the lira was trading at 4.5920 per U.S. dollar, down 1.59 percent from 4.52 at Thursday’s close.
It had been strengthened this week by the central bank’s announcement on Monday that it would return to using the one-week repo rate as its benchmark interest rate, taking a long expected step to simplify policy and make it more predictable.
Resuming repo funding for the first time since January 2017, the central bank injected 29 billion lira at a one-week repo auction on Friday, with bids amounting to 56.77 billion lira.
At an emergency meeting last week it also hiked interest rates by 3 percentage points to support the lira, which has strengthened from a record low of 4.9290 hit on May 23 but is still down around 17 percent against the dollar this year.
Per Hammarlund, chief emerging markets strategist at SEB, said the lira weakness on Friday may have been linked to remarks overnight by President Tayyip Erdogan.
Erdogan said late on Thursday that citizens who keep money in foreign currency should convert it to lira and that this would teach a lesson to those who are trying to shake Turkey through exchange rates.
The main BIST 100 share index dipped 1.47 percent to 99,171 points. The banking index closed down 3.42 percent.
Investor attention was also focused on May inflation data, due on June 4, which could boost expectations of another rate hike at the central bank’s rate-setting meeting on June 7. In a Reuters poll, analysts forecast consumer price inflation would be up 1.45 percent month-on-month.
An adviser to Erdogan, Cemil Ertem, told state broadcaster TRT Haber that the bank had said it would respond as necessary if the inflation data is higher than expected, but he forecast inflation would be in line with expectations.
But “even if the lira comes through these upcoming events unscathed, the more fundamental point is that it remains vulnerable to a fresh deterioration in global investor sentiment”, Capital Economics said in a note to clients.
Investors were also monitoring Friday’s economic data, with a Purchasing Managers’ Index (PMI) survey showing Turkish manufacturing activity contracted in May, driven by a slowdown in new orders and market fluctuations.
Turkey’s exports surged 12.2 percent year-on-year in May to reach $14 billion, the Turkish Exporters Assembly (TIM) said.
The yield on Turkey’s benchmark 10-year dollar bond rose to 14.81 percent from 14.13 percent in spot trade on Thursday.
Additional reporting by Behiye Selin Taner and Daren Butler; Editing by Dominic Evans and Catherine Evans