ISTANBUL (Reuters) - The Turkish lira fell to new lows on Wednesday despite efforts by the central bank to support it by boosting dollar supply, making it the worst performing major currency this year with losses of more than 9 percent against the dollar.
The lira slumped as much as 2.5 percent against the dollar in early trade on Wednesday as concern about Turkey's political and economic stability was compounded by doubts about whether the central bank would take strong enough action.
The bank's reluctance to hike interest rates to stem the lira's falls has exacerbated worries triggered by militant bombings, an economic slowdown and political uncertainty over plans to bolster President Tayyip Erdogan's powers.
The lira TRYTOM=D3, which has lost around a quarter of its value against the dollar since an attempted coup in July, hit a record low of 3.8950 before firming to 3.8540 by 0613 GMT.
On Tuesday, the central bank reduced forex reserve requirement ratios by 50 basis points in a move it said would add some $1.5 billion liquidity to the system.
It said developments in markets were being monitored closely and additional steps may be taken in order to maintain price and financial stability if deemed necessary.
Its move brought only a temporary pause in the lira's slide.
"The measures announced by the central bank yesterday created the impression that instead of a rate hike it would rather gently raise forex liquidity and the cost of funding," said one banker, who declined to be identified.
"The market expectation is that the policy rate be raised at least 150 basis points within three months. If a step is not taken on this, the pressure on the lira will continue," he said.
Erdogan, whose priority is boosting flagging growth, wants lower borrowing costs and is a fierce critic of high interest rates. Some of his aides and ministers have portrayed the lira's slide as part of an attack on the Turkish economy.
At its last rate-setting meeting in December, the central bank defied expectations of a hike and left rates on hold. It will meet again to set rates on Jan. 24.
The lira also hit a record low of 4.1089 against the euro EURTRY=, weakening from a close on Tuesday of 3.9971, before firming slightly to 4.0454.
The yield on the benchmark 10-year bond tTR110226T0=IS was at 11.45 percent in spot trade on Tuesday and was at 11.44 percent in Wednesday-dated trade. The main share index .XU100 closed steady on Tuesday at 77,393.69 points.
Editing by Nick Tattersall & Shri Navaratnam