By Humeyra Pamuk
ISTANBUL, July 9 (Reuters) - The Turkish lira rose further off an all-time low on Tuesday in the wake of a forex-selling spree by the central bank, but analysts queried how long the bank can burn up foreign reserves and said it may consider raising interest rates this month.
Through seven separate auctions the central bank sold a record $2.25 billion of foreign currency on Monday, shoring up the lira which had tumbled some 6 percent since late May.
The local currency is now up around 2 percent from the new low of $1.9737 it hit on Monday.
Analysts say that the Turkish central bank's forex interventions may not be enough to defend the currency, however, and that it may have to use interest rate hikes next.
'I cannot see the use of FX sales alone doing the trick,' said Timothy Ash, head of emerging market research at Standard Bank. 'The question for the CBRT (central bank) and the markets now is will direct intervention be enough, and more particularly do they have enough reserves to hold the line,' he added.
The sell-off in the lira had begun in early May after the U.S. Federal Reserve began to signal that it may begin scaling back its stimulus measures, which have pumped up asset prices and pushed down yields worldwide.
Weeks of fierce anti-government protests against Prime Minister Tayyip Erdogan's perceived authoritarianism since late May have also weighed on the currency, although the protests have since calmed.
The likely change of direction in Fed policy is forcing global markets to face up to a new high-yield environment, leading many investors to pull money out of emerging markets.
Turkey's central bank has been holding intraday forex auctions since June 11 to support the weakening lira. It has sold a total of $4.9 billion of foreign reserves this year including Monday's record sale, reducing its net foreign reserves to around $41 billion, according to bankers' calculations.
Prior to May, the bank had been cutting interest rates to stimulate a slowing economy and curb the strong lira, which makes exports more expensive and risks widening the country's already huge current account deficit.
By 1126 GMT, the lira stood at 1.9400 against the dollar, while the yield on the 10-year bond maturing on March 8, 2023, was at 8.93 percent, unchanged from Monday. The main share index rose 1.5 percent.
RELUCTANCE TO HIKE RATES
Turkey is not alone in seeing its currency plunge to multi-year or record lows against the resurgent dollar. Many emerging central banks have rallied to defend their currencies on fears that their weakness will lead to a wholesale exodus of foreign capital from their markets.
Turkey's central bank on Monday started forex-selling auctions on June 11, and on Monday it announced that it had begun 'a strong additional monetary tightening practice', adding that the move would be temporary.
Analysts say the bank may now consider raising its overnight lending rate at its policy meeting on July 23, widening the interest rate corridor it uses to cope with market conditions. Political sensitivities, however, argue against this.
'We do not expect TRY (lira) will stabilise until the CBT starts delivering on rate-hike expectations,' Bank of America Merrill Lynch analysts said in a research note. 'The pressure on TRY is due to the market's pricing of global rates normalization rather than a shortage of USD liquidity.'
The bank's reluctance to use rates is partly political, analysts say. The prime minister often criticises high rates, and rattled markets last month by accusing 'an interest rate lobby' of conspiring with foreign forces to hurt the economy.
'The CBRT are clearly now highly sensitive to hiking policy rates due to all the political noise about the interest lobby - hugely disappointing as I think this damages the credibility of the CBRT,' Ash at Standard Bank said.
'If the central bank is tasked with managing the market, but one of its key tools is taken away (policy rates) I think it is going into the battle with one arm tied behind its back.'
In its last policy meeting the bank kept its main one-week repo rate at 4.50 percent, its borrowing rate at 3.5 percent and its overnight lending rate at 6.5 percent.
Data on Monday showed the economy remains sluggish, with industrial production up just 1 percent year-on-year in May. Economy Minister Zafer Caglayan said Turkey needed faster output growth to meet its 4 percent economic growth target this year.
(Editing by Hugh Lawson)
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Keywords: MARKETS TURKEY/
ISTANBUL, July 9 (Reuters) - The Turkish lira rose off an all-time low on Tuesday in the wake of a forex-selling spree by the central bank, while bond yields and main share index rose slightly.
Through seven separate auctions the central bank sold a record $2.25 billion of foreign currency on Monday, shoring up the lira, which had tumbled some 6 percent since late May.
But analysts queried how long the bank can burn up foreign reserves and said it may consider raising interest rates this month.
The local currency is now up almost 1.5 percent from the new low of $1.9737 it hit on Monday.
By 1548 GMT, the lira stood at 1.9460 against the dollar, while the yield on the 10-year bond maturing on March 8, 2023, was at 8.96 percent, up three basis points from Monday. The main share index rose 0.42 percent.
(Writing by Ece Toksabay; Editing by Mark Heinrich) Keywords: MARKETS TURKEY/CLOSE
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