Turkey's lira weakened more than 3 percent on Thursday, giving up a large chunk of the gains it made after the central bank raised interest rates by 300 points a day earlier, as investors bet another hike would be needed to tame the sell-off. The central bank raised its top interest rate to 16.5 percent at an extraordinary meeting on Wednesday in a bid to break a relentless, weeks-long fall in the currency. The lira had depreciated as much as 23 percent so far this year before the bank's move.
The lira was at 4.7891 against the dollar at 1509 GMT, versus its close of 4.5900. It hit a record low of 4.9290 on Wednesday before the rate hike. It is now down some 19 percent year-to-date.
The yield on Turkish 10-year government bonds fell to its lowest since May 15. Dollar bonds rose, and the cost of insuring Turkish debt against default fell to a one-week low.
The central bank on Thursday also increased the maximum total of forward foreign exchange (NDF) sale positions from $6.15 billion to $8 billion for the second quarter. Such a move, providing more dollar liquidity to the market, could theoretically support the lira in the medium-term, but appeared to have little immediate effect.
The currency's dramatic decline reflects investor concerns about the central bank's ability to tame double-digit inflation, particularly after President Tayyip Erdogan - a self-described "enemy of interest rates" - said he expected to assert more policy control after June 24 elections.