The Turkish lira weakened on Friday after sources said the United States was poised to impose sanctions on Turkey over its acquisition of Russian S-400 air defense systems, a move set to worsen ties between the two NATO allies.
The sanctions threat pushed the lira to as far as 7.9375 versus the dollar, off 0.6%. It shed another 1% late on Thursday after Reuters reported the pending US sanctions, and has shed 25% this year, among the worst in emerging markets.
The US move, likely to infuriate Ankara and weigh on ties as President-elect Joe Biden prepares to take office, is set to be announced as early as Friday and target Turkey's Defense Industries Directorate, sources said.
Separately, European Union leaders agreed on Thursday to prepare limited sanctions on Turkish individuals over an energy exploration dispute with Greece and Cyprus, postponing any harsher steps until March.
A treasury desk trader at one bank said the simultaneous moves by the United States and EU were negative but would not have a direct impact on the Turkish economy in the short term, and have only a limited market impact if they remain mild.
"If sanctions are left like this, pricing may even turn positive in the period ahead," he said. "But we understand that this may remain a medium-term risk factor for the lira."
The lira has hit a series of all-time lows this year on concerns over depleted reserves, negative real rates and high inflation. It rebounded from a record low of 8.58 last month after the country's top two economic policymakers were replaced.
