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UPDATE 1-Turkish lira gives up gains, geopolitical concerns weigh

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ISTANBUL, Oct 1 (Reuters) - Turkey’s lira surrendered earlier gains on Thursday as investors kept a cautious eye on geopolitical developments regarding the eastern Mediterranean and the conflict between Turkish ally Azerbaijan and Armenia.

The lira was flat at 7.7440 against the dollar at 1125 GMT. Earlier it rose about 1% to 7.64 amid a wider recovery in emerging markets, and after authorities rolled back some measures taken at the height of the COVID-19 pandemic.

Cyprus defied mounting pressure on Thursday to approve European Union sanctions on Belarus ahead of a summit, urging fellow EU governments to also sanction Turkey over its oil and gas exploration in the Mediterranean.

Separately, France accused Turkey of sending Syrian mercenaries to fight in Nagorno-Karabakh, where dozens have been killed in clashes between Azerbaijan and ethnic Armenian forces. Turkey has denied sending mercenaries to take part in the conflict.

“The tension between Armenia and Azerbaijan and many other subjects have become jumbled together,” said a treasury department trader at one bank. “We think a return of foreigners to the Turkey portfolio may be much slower.”

The lira hit a record low of 7.8555 on Tuesday, bringing its losses so far this year to 24% as it suffers from concerns over depleted forex reserves, costly state interventions in FX markets, and negative real interest rates.

It rebounded following the release of an optimistic medium-term economic programme and decisions to reduce taxes on forex transactions and bank deposits.

Finance Minister Berat Albayrak said on Tuesday that Turkey’s economy was set to grow 0.3% this year as it recovers from the coronavirus crisis, pledging more normalisation steps to boost the economy under a three-year plan.

The European Bank for Reconstruction and Development expects Turkey’s economy to shrink 3.5% this year and rebound strongly in 2021, and does not expect last week’s surprise interest rate hike to set off a policy tightening cycle.

A survey on Thursday showed Turkey’s manufacturing sector continued to recover in September, but with the headline PMI declining to 52.8 from 54.3 in August. (Reporting by Nevzat Devranoglu, Ali Kucukgocmen and Ezgi Erkoyun; Writing by Daren Butler; Editing by Jonathan Spicer and Pravin Char)

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