Investing.com - The dollar was lower against the Turkish lira for a second session on Tuesday after Turkey’s central bank signaled that it may hike interest rates to arrest the steep depreciation in the lira, ahead of an emergency policy meeting later in the day.
USD/TRY fell to 2.2538, a one-week low, and was last down 0.68% to 2.2675. The pair rose to record highs of 2.3895 on Monday.
The lira found support after Turkey's central bank suggested that an interest rate increase may be implemented to protect the weakening lira and revised its forecast for inflation sharply higher.
The bank lifted its forecast for year-end inflation to 6.6% from 5.3%, saying the rise in exchange rates and currency market volatility would contribute to higher inflation.
Speaking ahead of the emergency monetary policy meeting Governor Erdem Basci indicated that a rate increase is possible after the lira fell to the latest in a series of record lows against the dollar on Monday.
"No one should be in doubt that the central bank will use all its policy tools to converge inflation to the 5% target…Our aim at tonight's meeting is to avoid a deterioration of pricing behavior and to take steps to ensure price stability," he said.
"We won't refrain from implementing permanent policy tightening if needed."
The central bank has held back from interest rate increases, amid political pressure to avoid higher borrowing costs, which could act as a drag on growth.
The bank announced the emergency policy meeting on Monday, citing “unhealthy price developments” after the lira slipped below 2.30 to the dollar, amid a broad based selloff in emerging markets. Concerns over the impact of the Federal Reserve scaling back its stimulus program, along with fears over a possible slowdown in China triggered the selloff.
Turkey’s lira is seen as particularly vulnerable to reductions in the Fed’s asset purchase program, as the country relies heavily on foreign investment to fund its huge current account gap.
The lira remained vulnerable ahead of Wednesday’s policy statement by the Fed amid expectations that the bank will cut its asset purchase program by another $10 billion, to $75 billion per month. The central bank announced the first cut to its stimulus program in December.
The selloff in the lira has been further fuelled by investor concerns over local political tensions, after a wide ranging corruption probe launched in December, focusing on figures close to the ruling APK party, forced a cabinet reshuffle.
The euro was also lower against the lira, with EUR/TRY falling 0.80% to 3.0969, down from Monday’s all-time high of 3.2729.