By Daren Butler and Humeyra Pamuk
ISTANBUL (Reuters) - Turkey doubled tariffs on some U.S. imports including alcohol, cars and tobacco on Wednesday in retaliation for U.S. moves, but the lira rallied further after the central bank's liquidity moves had the effect of supporting the currency.
Ankara acted amid increased tension between the two NATO allies over Turkey's detention of a Christian American pastor and other diplomatic issues, which have helped send the lira tumbling to record lows against the dollar.
The currency
It rebounded some 6 percent on Wednesday, briefly strengthening to less than 6.0 against the dollar, after the central bank squeezed lira liquidity in the market, effectively pushing up rates and supporting the currency.
Optimism about better relations with the European Union after a Turkish court released two Greek soldiers pending trial and a banking watchdog's step to limit foreign exchange swap transactions have also helped the lira.
"They are squeezing lira liquidity out of the system now and pushing interest rates higher," said Cristian Maggio, head of emerging markets strategy at TD Securities.
"Rates have gone up by 10 percent ... The central bank has not done this through a change in the benchmark rates, but they are squeezing liquidity, so the result is the same," Maggio said.
The lira firmed as far as 5.75 against the dollar on Wednesday and stood at 6.1320 at 1243 GMT in a move initially triggered by the Turkish court decision on the Greek soldiers who faced espionage charges.
A treasury desk trader at one bank said this showed relations with the EU could recover "while tense relations continue with the USA."
The lira was also helped by a step from the banking watchdog BDDK, cutting the limit for Turkish banks' forex swap, spot and forward transactions with foreign banks to 25 percent of a bank's equity.
"Remarkable turnaround," Tim Ash, Bluebay Asset Management senior emerging markets analyst wrote in a client note. "They are killing offshore lira liquidity to stop foreigners shorting the lira," he said.
The lira had rebounded about 8 percent on Tuesday on news of a planned conference call on Thursday in which the finance minister will seek to reassure international investors. A Finance Ministry official said so far 3,000 people have signed up for the call.
Turkey's banking sector remained strong and liquid and the measures taken to support the market have started to show impact, Turkey's Akbank chief executive said and added there were was no withdrawal of deposits.
SPAT WITH U.S.
A decree signed by Erdogan doubled Turkish tariffs on passenger cars to 120 percent, on alcoholic drinks to 140 percent and on leaf tobacco to 60 percent. Tariffs were also doubled on goods such as cosmetics, rice and coal.
The duties were raised in response to the U.S. administration's "deliberate attacks on our economy," Vice President Fuat Oktay wrote on Twitter. Last Friday, U.S. President Donald Trump said he had authorised higher tariffs on aluminium and steel imports from Turkey.
The United States was the fourth largest source of imports to Turkey last year, accounting for $12 billion of imports, according to IMF statistics. Turkey's exports to the United States last year amounted to $8.7 billion, making it Turkey's fifth-largest export market.
NATO allies the United States and Turkey have been at loggerheads over a wide range of topics including diverging interests in Syria, Ankara's ambition to buy Russian defence systems and Andrew Brunson, a pastor on trial in Turkey for terrorism charges.
Trump has repeatedly asked for Brunson's release, while Ankara said the decision was up to the court. On Wednesday, a Turkish court in the Aegean province of Izmir, where Brunson is on trial, rejected the pastor's appeal to be released from house arrest. An upper court had yet to rule on the appeal, his lawyer told Reuters.
Washington warned more economic pressures may be in store for Turkey if it refuses to release Brunson, a White House official said on Tuesday.
Erdogan has said Turkey is the target of an economic war, and has made repeated calls for Turks to sell their dollars and euros to shore up the currency. On Tuesday, he said Turkey would boycott U.S. electronic products.
In another high-profile case, a Turkish court ruled on Wednesday to release from jail Taner Kilic, the local chair of Amnesty International, a researcher from the rights group said.