Markets down, lira near record low on graft probe

The lira touched an all-time low of 2.0983 against the dollar, first hit on Friday. It stood at 2.09 on Monday afternoon. The main stock index fell 2.77 percent to 67,644 after sustaining heavy losses last week.

The market also awaited the central bank's announcement of its 2014 monetary and exchange rate policy report due Tuesday, in which it will provide guidance after the Fed decision. Already under pressure this year by expectations that the Fed would begin to stem a flood of dollars that has boosted global emerging markets, the lira was further beaten down by a police investigation in which dozens of senior businessmen and people with links to the government were detained last week.

Twenty-four people, including the sons of two ministers and the head of state-run Halkbank, have been formally charged in connection with the corruption inquiry last week. Thousands took to the streets of İstanbul on Sunday to protest against the government over the corruption scandal.

Turkey is more exposed to any tightening of the supply of cash globally as it needs to import almost all of the oil it uses, which gives it one of the world's biggest current-account shortfalls and makes it dependent on capital inflows. Turkish debt insurance costs surged to 3-1/2 month highs of Friday. The yield on the 10-year benchmark bond was at 10.1 percent.

Halkbank said on Monday in a stock-exchange filing it had not faced questioning by the police or judiciary as a corporate entity in connection with the graft investigation and that it had complied with the law and banking regulations. Its shares declined 1.14 percent to 13 lira. Emlak Konut rose 1.86 percent to 2.19 lira after its officials were released in the corruption probe.

About 70 police officers, including the powerful head of Istanbul's force, have since been removed from duty accused of abuse of office for keeping the investigation quiet from higher level officials in security institutions. The central bank on Friday said that on days of excessive volatility, the foreign currency sales amount may be raised up to 10 times of the announced minimum amount. On Monday, it said it would not hold its fixed-rate, one-week repo to additional monetary tightening.

"The main issue will be (the central bank's) game plan against depreciation pressure on the currency," said Erkin Işık, a strategist at TEB BNP Paribas. "In the last policy meeting, before the local issues unfolded, they said, 'The committee assessed that the current stance of the monetary policy is appropriate to contain inflationary risks.' If the governor repeats this rhetoric, it may put further depreciation pressure on the currency," he said.