The Turkish lira weakened more than 0.5% on Friday as the United States raised pressure on Turkey over its plans to install Russian S-400 air defences, marking the currency's second day of losses after its longest winning streak since May 2014. The currency fell after Reuters, citing US officials, reported that Washington would stop accepting any additional Turkish pilots hoping to train in the United States on F-35 fighter jets.
It was the latest escalation of the dispute over Ankara's plans to purchase the Russian system, which if delivered to Turkey would very likely trigger US sanctions. The lira was down some 0.7% at 1335 GMT, trading at 5.8175 against the dollar, after weakening some 1.5% to 5.8695 earlier in the day. On Tuesday it had hit a 2-month high of 5.6605.
Turkish markets re-opened on Friday after a three-day holiday. On Wednesday the lira firmed for a 10th straight day thanks to a weaker dollar and expectations the US Federal Reserve would cut interest rates and boost a sluggish global economy. But on Thursday it reversed course and slid 0.8%. Friday's selloff was partially offset by data showing disappointing US jobs growth, which stoked predictions of policy accommodation from the Fed.
A forex trader said the lira's reaction to the Reuters report had been amplified by thin post-holiday trade. The report "played a large role in the rise of the exchange rate," the trader said. "I think this news isn't going to disperse the positive mood on the lira."
The two Nato allies have sparred publicly for months over Turkey's order for Russia's S-400 air defence system, which Washington says poses a threat to the F-35 stealth fighters, which Turkey also plans to buy.
The lira is also pressured by a "relatively low" conviction that Turkey will address the structural issues that hamper its economy, as well as by uncertainty over a June 23 re-run of the Istanbul mayoral election, said Piotr Matys, an emerging markets forex strategist at Rabobank.
"The only way to restore confidence is to stabilise the lira by implementing a comprehensive package of economic reforms," he said. "Investors demand concrete details of economic policies, including a very specific timetable so they could judge progress in implementing them."
The lira has lost some 10% this year, mainly over the S-400 deal and election uncertainty.
The currency's gains over the past week were due to foreign investors buying the currency via swap positions ahead of the holiday, to a dovish shift at the Fed and the European Central Bank, and quick pricing in the low-liquidity environment, said Orkun Godek, strategist at Deniz Investment.
On Thursday S&P Global Ratings said the lira was fundamentally undervalued and would continue to support Turkey's export sector.
The currency lost nearly 30% against the dollar last year on concerns over the independence of the central bank and Ankara's ties with Washington. The currency crisis caused inflation to soar to a 15-year high and drove the economy into recession.
The main BIST100 share index was up 2.2% on Friday, while the main banking index rose 4.4%. The Turkish central bank's net international reserves stood at $27.92 billion as of May 31, data showed, up from $26.52 billion a week earlier.
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