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Turkish lira rises as coup failed, regains almost half of slide

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A customer gives banknotes to a teller inside a currency exchange bureau at Taksim Square in Istanbul, Turkey on July 17, 2016. The Turkish lira gained Monday, paring almost half the loss triggered by the thwarted coup attempt that broke out in the final hours of trading last week.

[ISTANBUL] The Turkish lira gained Monday, paring almost half the loss triggered by the thwarted coup attempt that broke out in the final hours of trading last week.

The currency gained 1.8 per cent to 2.9620 per US dollar as of 7:45 am in Singapore, trimming the 4.6 per cent plunge on Friday night, when tanks rolled through the streets of Ankara and Istanbul as a breakaway faction of army officers said they had assumed control of the country. The uprising was quashed and President Recep Tayyip Erdogan has pledged reprisals.

The short-lived putsch erupted about two hours before trade in the Turkish currency stopped for the weekend and sent the lira tumbling by the most in eight years. Investors will probably buy the slump before assessing any longer-term damage to the economy, according to Tatha Ghose, a London-based analyst at Commerzbank AG.

"Prices will likely be volatile for some time, but in the end, investors will likely use this as a buying opportunity," Mr Ghose said on Sunday before lira trading opened.

"The main question for investors now is whether or not there will be a residual impact on Turkey's long-term risk premium."

Mr Ghose expects the currency to gradually strengthen to 2.95 or even 2.90 per US dollar, he said in an e-mailed report before trade re-opened. The lira closed last week at 3.0157 per US dollar, about 2 per cent away from a record low of 3.0752 in September.

Goldman Sachs Group Inc is less sanguine. The investment bank lowered its forecasts for the lira over the weekend, saying the currency will slide to 3.10 within three months, after previously seeing it at 2.95.

"While the immediate level of uncertainty has been sharply reduced post the failure of the takeover and a renewed coup appears unlikely, we expect the level of political risk will remain elevated and hence have implications for the economy," the bank said in a report from analyst Clemens Grafe.

In an effort to quell investor concerns, policy makers said Sunday they will provide unlimited liquidity to banks and would support the lira by removing the limits on foreign currency deposits that commercial lenders are allowed to use as collateral. 

The central bank is scheduled to hold a policy meeting Tuesday and the median estimate of economists surveyed by Bloomberg as of Friday was for a further 50-basis-point reduction in the overnight lending rate.

Stocks, Bonds

The Turkish central bank has lowered the overnight interest rate by 175 basis points this year amid slowing inflation, supporting a rally in Turkish assets. The Borsa Istanbul Index, which was closed at the the time of the coup attempt, has climbed 15 per cent this year. The yield on Turkish five-year local bonds has dropped more than every other emerging-market nation except Brazil.

While the economy has been among the biggest beneficiaries of the global clamor for yield as central banks pump cash into economies, Friday's coup attempt left some 200 dead and has been followed by massive reprisals that risk unnerving investors.

Thousands of army officers and judges were swept up in a nationwide wave of arrests as Erdogan and the ruling AK Party moved to cement power. While some investors express concern that the president's quest to centralize power leaves the nation vulnerable to social unrest, others see his survival as the surest bet of stability for a Nato ally entangled in the war in neighboring Syria and in conflicts with Kurdish separatists.

The market could demonstrate a "sanguine take on events over the weekend, given that security has been restored," Timothy Ash, a credit strategist at Nomura Plc in London, said in an e-mailed note.

"This could offer the prospect of a more stable political environment as a result - albeit leaving longer term concerns over the course of economic policy and democracy."