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İstanbul election challenges, strained US relations lead Turkish lira to hit 6-month low

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The Turkish lira hit its weakest intraday level against the dollar since mid-October on Wednesday as investors weighed up risks generated by challenges to İstanbul election results and strains in relations with the United States.

The lira weakened to 5.8810 from a previous close of 5.83, bringing declines this year to 10 percent, on top of a near 30 percent fall in 2018. Dollar strength contributed to the lira weakening. It was the weakest level since Oct. 15, excluding a brief overnight “flash crash” in January.

Turkey’s election board on Tuesday rejected one of a series of objections by President Recep Tayyip Erdoğan’s party to last month’s Istanbul elections, which were narrowly won by the opposition. The ruling party wants the elections annulled and re-run.

Market attention was also turning to the Turkish central bank’s rate-setting meeting on Thursday, when it is expected to keep its policy rate unchanged at 24 percent.

Fitch Solutions said the central bank has little room to ease its key policy rate over the coming months, given a need to encourage foreign investor inflows and attract domestic depositors to holding lira.

It forecast 400 basis points in policy rate cuts this year given the deterioration in the domestic economy and declining inflationary pressures.

“But the weaker lira and precarious external funding situation will likely mean a longer postponement of monetary easing,” the Fitch Solutions commentary said.

Unease about tense relations with the United States has been fuelled by the US demand on Monday that buyers of Iranian oil, including Turkey, stop purchases by May 1 or face sanctions, a move to choke off Tehran’s oil revenues.

Washington re-imposed sanctions in November, unilaterally pulling out of a 2015 accord between Iran and six world powers to curb Tehran’s nuclear program. Ties with Washington have been under pressure for months over Turkey’s order for a Russian S-400 missile defense system.

Turkish media reported last week that Turkey was considering whether the S-400s which Turkey is buying from Russia could be deployed in Azerbaijan or Qatar, rather than within Turkey, as a way to overcome the dispute.

Foreign Minister Mevlüt Çavuşoğlu was cited as telling Russian news agency Sputnik on Tuesday that deploying the S-400s in Azerbaijan or Qatar had never been on the agenda and that Turkey was now talking with Russia about the timing of the delivery.

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