The Turkish lira firmed on Friday on rising global risk appetite and on continued support after the central bank this week announced a plan to shore up the currency, while bond yields fell in low volumes before markets closed early for a public holiday.
Assets continued to be driven higher by a recovery in global risk sentiment after European leaders reached a deal to address the eurozone debt crisis and after data on Thursday showed the US economy grew at its fastest pace in a year in the third quarter.
The lira firmed to 1.7501 against the dollar from a previous interbank close of 1.7620. The lira had strengthened to its highest level in 1-1/2 months at 1.7425 on Thursday after eurozone leaders struck a deal, which boosted global investor appetite for riskier emerging market assets.
"The euro's strengthening helped the lira to extend its gains. There are no big volumes in the market today," said one Istanbul banker. Against a euro-dollar basket, the currency stood at 2.1149 compared with a previous close of 2.1099. On Thursday it had traded as high as 2.0909, its strongest level in a month.
The Turkish central bank injected 25 billion lira ($14.32 billion) into the market in a one-week repo auction on Friday while draining 11 billion lira ($6.3 billion) from the market. Since last week liquidity has been tightening as the central bank has cut the amount it injects each day at repo auctions. That has pushed the overnight repo rate up by nearly 300 basis points to almost 11.2 percent by Friday, encouraging primary dealers to use the central bank facility rather than buy at high rates in the market.
The central bank said this week it had started tightening monetary policy to support the lira, which it said was undervalued and creating inflation pressure. This month the bank raised the overnight lending rate to 12.5 percent from 9 percent. However, its tightening policy is also balanced by its decision to cut lira reserve requirement ratios (RRRs) from November 11.
The yield on Turkey's benchmark bond maturing on July 17, 2013 stood at 9.76 percent, down from a previous close of 9.90 percent. The main Istanbul share index closed up 0.75 percent on Friday at 57,042.36 points, underperforming the MSCI emerging markets index, which was up 3.48 percent.