Turkish lira hammered as political turmoil rattles investors

ISTANBUL (AFP) - 

The Turkish lira remained under pressure Thursday as political uncertainty rattled investors after it emerged Prime Minister Ahmet Davutoglu is set to step down in a move giving President Recep Tayyip Erdogan even more power.

The lira lost almost 4 percent in value against the dollar on Wednesday -- its heaviest daily loss this year -- as news broke that crisis talks between Davutoglu and Erdogan had failed to resolve tensions between the two men.

After that hammering, the lira rallied slightly Thursday to trade at 2.91 to the dollar, a gain of 1.35 percent, but still still well off its 2.85 level against the dollar before the news broke.

"Politics has once again emerged as a major risk for the lira, which is likely to remain vulnerable in the coming days," analysts at Rabobank said in a note to clients.

The ruling Justice and Development Party (AKP) is now set to hold an extraordinary congress where Davutoglu is expected to surrender his twin jobs of party chairman and prime minister.

The equity also took the news badly, with participants fearing the development was a move by Erdogan to tighten his grip on all areas of policy, including the economy.

The Istanbul stock market's benchmark 100 Index lost 1.40 percent to trade at 78,274 points.

Rabobank said Davutoglu had been perceived by markets as being "far more moderate" than Erdogan. "If Davutoglu indeed resigns, it will be a major blow for the lira and Turkish assets," it added.

Erdogan's reputation as a safe pair of hands on the economy was harmed last year when he piled pressure on the nominally independent central bank to cut interest rates for the sake of growth at a time of high inflation.

"The political uncertainty means that we're likely to see further falls in Turkish asset prices in the near term," said William Jackson, senior emerging markets economist at Capital Economics in London.

© 2016 AFP