* Lira appreciation could develop into central bank headache
* Bank seen uncomfortable with lira/basket beyond 1.9 to 1.8
* Strong currency could undo c.account deficit improvement
* New symbol launched in March to boost lira's status
By Seltem Iyigun and Alexandra Hudson
ISTANBUL, Aug 17 (Reuters) - When selecting a sign for the euro 16 years ago, European commissioners took a Greek epsilon and crossed it with two horizontal lines to signify stability.
The Turks, who unveiled a new character for the lira currency in March, aimed a step higher in the symbolism stakes.
The Central Bank plucked a lithe "anchor-like" sign from the more than 800 entries in a special design competition then tilted its horizontal lines upwards - trumpeting the economy's strength and the lira's intended trajectory.
So far the character has fitted the bill.
Growth continues, albeit at a less breathless pace than in 2011, equities have soared around 25 percent, bond yields have fallen some 300-400 basis points and the lira has appreciated about 5 percent since the start of the year.
Despite the self-assured new symbol however, there are very clear limits to the amount of lira appreciation the central bank - which gave strong hints of looser policy after its monthly meeting on Thursday - will tolerate.
A strong currency creates risks for the current account deficit, the Turkish economy's perennial Achilles' heel, which authorities have succeeded in reducing by a third this year.
The level at which the lira is considered too strong beckons, analysts say. But the currency - trading at around 1.75 to the dollar - is still a long way from the 1.4 level it tested in late 2010 or the rate of 1.2 seen in 2008.
The bank says it has no target level for the lira, but it pays close attention to the currency's value against a dollar-euro basket
At Thursday's policy meeting, the central bank eased its monetary stance very slightly by raising the amount of lira reserves that commercial lenders can hold in foreign currencies and gold. It also gave its clearest signal yet that it could cut rates in the months ahead as inflation falls.
"All in all, the central bank seems to have started to employ the new reserve requirement mechanism actively. The decisions primarily aim to prevent excessive appreciation of the lira," said Nilufer Sezgin, chief economist at Ekspres Invest.
SAFE HAVEN
Bridging the crisis-struck euro zone and the volatile conflict-hit Middle East, Turkey has again become highly attractive for investors, who have poured money into it. This has unnerved the powerful exporters' lobby.
"If the exchange rate strengthens too far, it may raise concerns that it will be harder for the recent export boom to help reduce the current account deficit," said economist William Jackson at Capital Economics.
"The euro-dollar basket now looks fairly strong, although it's still weaker than its average over the past two and a half years of around 1.80."
He thinks the bank would be fairly relaxed about modest appreciation, but if it happens too quickly the bank would ease liquidity and possibly intervene in the forex market.
Ozlem Derici, senior economist with Ata Invest also sees the comfort level at around 1.8, particularly if the appreciation is rapid. Rather than using buying or selling auctions to fine-tune the exchange rate she believes the bank will use its new coefficient tool, which it applies to part of the lira required reserves that banks can hold in forex and gold.
Others believe the central bank will not allow the currency such a long leash.
"We think the central bank feels comfortable when the lira is between 1.95-2 versus the euro-dollar basket," said Tufan Comert, strategist at Garanti Securities.
Haluk Burumcekci, chief economist at EFG in Istanbul, sees it at 1.95-1.97.
"We think the first line of defence for the central bank would be to keep short-term rates a bit lower than currently, if the basket significantly trails the 2.00 level."
The bank has already started to do this - overnight lira repo rates recently fell to 5 percent from a level of 10 in May and June.
The bank has held the main policy rate - the one-week repo rate - at an all-time low of 5.75 percent since last August. It has at the same time manipulated its interest rate corridor - the gap between its overnight lending and borrowing rates - to tighten monetary conditions.
With growth slowing, it will start to ease monetary policy this year, looking first to narrow the corridor. That will help cool a currency which continues to attract carry trades - where investors borrow in low-interest currencies to invest in higher-yielding assets - despite a steep fall in Turkish interest rates from around 17 percent to 5.75 percent.
It could also placate an angry exporters' lobby, which is already nervous with the basket at 2. That hurts their profitability and sees them lose clients and markets, according to the Turkish Exporters' Association head Mehmet Buyukeksi.
"We urge the central bank to start easing the interest rate corridor downwards as an initial step. Then it should cut its policy rates," he said.
(Additional reporting by Nevzat Devranoglu; Editing by Catherine Evans)
((alexandra.hudson@thomsonreuters.com)(90 212 350 7062)(Reuters Messaging: alexandra.hudson.thomsonreuters.com@reuters.net))
Keywords: TURKEY LIRA/CBANK
