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Istanbul (AFP) - The Turkish lira on Monday hit new record lows against the dollar and euro as strains caused by a diplomatic spat with the United States compounded concerns over domestic economic policy.
President Recep Tayyip Erdogan on Saturday said Ankara would sanction two American officials in response to a similar move by the United States against Turkish ministers over the detention in Turkey of pastor Andrew Brunson.
Analysts say that while the sanctions themselves are almost meaningless, the strains risk hurting the already embattled currency and could be a harbinger of tougher measures to come from Washington.
The lira, which last week hit 5 to the dollar for the first time in history over the sanctions, was trading at 5.17 to the dollar, a loss of 1.8 percent on the day.
Against the euro, the lira was trading at 5.97, a loss of 1.7 percent on the day, having earlier tested the 6.0 ceiling for the first time.
The currency was also pressured by an announcement by the Office of the US Trade Representative it was reviewing Turkey's eligibility of a scheme that allows the export of certain products to the US duty free.
The row with the United States had added to concerns about economic and monetary policy in Turkey after the re-election of Erdogan for a new term with strengthened powers on June 24.
One of Erdogan's first moves after his inauguration was to jettison the relatively trusted economic policymaking team and hand a newly expanded finance ministry to his son-in-law Berat Albayrak.
Meanwhile, Turkey's central bank -- which is theoretically independent -- disappointed markets on July 24 by leaving rates unchanged despite inflation that has now reached almost 16 percent.
Erdogan has repeatedly urged the central bank to lower rates to boost growth, baffling markets by expressing the unorthodox view that lower interest rates can help bring down inflation.
"The current level of real policy rate is insufficient to compensate for the heightened geopolitical risk premium after US sanctions, which will keep the lira vulnerable to a further escalation of geopolitical tensions," said Inan Demir, economist at Nomura, in a note to clients
He added the central bank's latest comments indicate that it is "not in a position to raise rates and the most that can be expected is to keep rates unchanged for an extended period."
"This means the risk-reward profile for the lira is still unattractive," he added.