April 8, 2019 / 8:29 AM / 5 months ago

UPDATE 2-Turkish lira weakens as Erdogan questions Istanbul election

(Adds analyst, background)

By Sarah Dadouch

ISTANBUL, April 8 (Reuters) - The Turkish lira weakened more than 1 percent against the dollar on Monday after President Tayyip Erdogan kept up pressure for a recount of local elections in the largest city Istanbul.

The currency stood at 5.6860 against the dollar at 1110 GMT.

Earlier, it had weakened to as much as 5.7120, down more than 1.5 percent from Friday’s close of 5.6220.

The lira has been pressured by initial results showing Erdogan’s AK Party (AKP) narrowly lost control of both Ankara and Istanbul to main opposition party CHP.

The AKP wants a recount in Istanbul, Turkey’s commercial hub, and Erdogan said the margin between the two top candidates was too small for the opposition to claim victory. He alleged “organised crimes” in the vote.

Erdogan also said the West Bank belongs to Palestinians, after Israeli Prime Minister Benjamin Netanyahu said he would annex settlements there if he wins Tuesday’s vote.

The lira’s decline was due to the potential for both a re-vote in Istanbul and a diplomatic spat with Washington over Israel, said Piotr Matys, emerging markets forex strategist at Rabobank.

“Contagion from Turkey could spill into other EM countries if the lira selloff escalates markedly in the coming weeks,” he said, adding a new economic plan to be announced by Finance Minister Berat Albayrak could restore confidence in the currency.

Albayrak is expected to announce the economic reform package on Wednesday, state-owned Anadolu agency reported.

LIRA CRISIS

Last year, the lira lost nearly 30 percent against the dollar on concerns over the independence of the central bank and worsening ties with Washington.

Ahead of the March 31 local elections, authorities and the central bank took unorthodox measures to put a floor under the lira.

The central bank opened a one-week repo auction on Monday for the first time since March 22, when it said it would suspend the auctions, effectively raising its average cost of funding.

The bank also decreased the lira interest rate limit for swap transactions to 24 percent on Monday, from 25.5 percent previously.

The moves signalled the central bank had reversed its course of tightening monetary policy, traders said.

Turkish banks, upon the request of authorities, stopped providing lira liquidity to London markets in the week ahead of the elections, which prevented traders from closing their short positions.

Monday’s decline in the lira was also due to “speculators” being able to bet against the lira without the restrictions imposed ahead of the local elections, Matys said.

The main share index was down 1.7 percent on Monday.

The yield on the benchmark 10-year bond climbed to 17.78 percent. (Reporting by Sarah Dadouch; Additional Reporting by Ali Kucukgocmen and Nevzat Devranoglu in Ankara; Editing by Jonathan Spicer, Ece Toksabay and Andrew Cawthorne)

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