Hands tied, Turkish central bank struggles to lift lira off lows
In a complex series of steps, the bank said it would adjust its reserve requirements - used to control the amount of dollars in the market - to temporarily boost forex liquidity by some \$1.5 billion over the coming weeks. The lira weakened to 2.6455 to the dollar by 1155 GMT, just shy of a record low hit last Friday, partly as expectations of a US interest rate hike pushed the dollar to multi-year highs.
The lira has fallen around 12 percent against the dollar this year, and was the worst-performing emerging market currency against the greenback on Tuesday, according to Reuters data.
Its falls have been exacerbated by Erdogan's demands for sharp interest rate cuts to boost growth ahead of a June election.
That has tied the central bank's hands, leaving it unable to contemplate a rate hike and trying instead to defend the currency with policy adjustments on the margins.
"In this environment countries don't need to give investors any excuse to sell," said Timothy Ash, head of emerging markets research at Standard Bank in London. "In Turkey's case we have an administration that thinks it is cleverer than everyone else, and the market.
Turkey needs to get back to plain vanilla policy (and) the government needs to back off from the central bank," he wrote in a note.
There is little immediate sign of that happening. Central Bank Governor Erdem Basci will brief Erdogan on Wednesday on the latest developments, and is due to meet with Prime Minister Ahmet Davutoglu and nine cabinet ministers later on Tuesday.
Economy Minister Nihat Zeybekci, one of the cabinet's most vocal critics of the central bank, said on Tuesday it should have cut interest rates before its last meeting in late February.
The cost of insuring exposure to Turkish debt rose to 11-month highs, with Turkey's 5-year credit default swaps (CDS) rising by 227 basis points, bankers said.
The benchmark 10-year government bond yield rose to 8.36 percent from 8.28 percent on Monday, while the main Istanbul stock index was down more than 2.7 percent, lagging emerging markets peers.
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