UPDATE 3-Turkish lira rebounds from record low against dollar

(Recasts with lira firming)

ISTANBUL, Aug 7 (Reuters) – Turkey’s lira firmed by around 0.5% against the dollar on Friday after hitting a record low in volatile trading, as investors weighed the impact of steps taken by the authorities to increase the cost of funding.

The lira stood at 7.1850 against the dollar at 1239 GMT compared with a close of 7.225 on Thursday, after hitting its historic low of 7.365. The currency has lost some 17% against the dollar so far this year.

Market authorities met senior bankers on Thursday to discuss the latest economic developments. Sources told Reuters that Central Bank Governor Murat Uysal clearly indicated at the meeting that funding costs will increase, although he did not say by how much.

The Turkish central bank said on Friday it was halving primary dealers liquidity limits, effectively decreasing the cheap funding that provided. The bank also did not open a weekly repo auction, a move bankers said was aimed at directing banks to secure liquidity from the 9.75% overnight lending facility.

The central bank has used this method in the past and it might resort to funding the market from the higher-rate late liquidity window if the pressure on the currency does not ease, Goldman Sachs said in a note.

At its latest meeting two weeks ago the central bank kept its policy rate at 8.25%, citing upward pressure on inflation indicators.

The overnight lending rate stands 150 basis points above the benchmark rate, while the late liquidity window rate is 300 bps above the benchmark rate.

Money market traders raised bets that the central bank would soon hike rates despite what is seen as pressure from President Tayyip Erdogan for cheap credit.

NEW STRATEGY

Piotr Matys, senior Emerging Markets FX strategist at Rabobank, said Turkey needed a new strategy to stabilise the lira.

“A weak currency will be the source of inflationary pressures and may undermine the still fragile confidence amongst households and corporates following the shock caused by the coronavirus pandemic,” Matys said.

Worries about the lira have driven local investors’ holdings of foreign currency and precious metals up by $9 billion in two weeks to a record high of $213 billion as of the end of July.

The blue-chip BIST 100 index pared losses and turned positive after falling as much as 4.5%. The banking index traded down 0.44% at 1240 GMT. (Writing by Ezgi Erkoyun; Editing by Kim Coghill, Dominic Evans and Hugh Lawson)

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