ISTANBUL- The Turkish lira hit a record low of 3.9780 against the dollar on Tuesday, accelerating losses to some 17 percent since September as concerns widened about Ankara's strained relations with the United States and central bank independence.
The central bank -- faced with the unenviable task of trying to balance double-digit inflation with President Tayyip Erdogan's demands for lower interest rates -- responded with emergency measures to tighten policy, although that failed to reverse the slide.
The lira's plunge has helped fuel inflation by driving up the cost of energy and other imports. Turkey imports almost all of its energy needs.
Worries about U.S. ties centre around the trial of Turkish gold trader Reza Zarrab, who is accused of violating U.S. sanctions on Iran. The Turkish government spokesman on Monday described the case as a "clear plot against Turkey" that lacks any legal basis.
The foreign investors upon whom Turkey relies to finance its big budget and current account deficits also have deep concerns about political pressure on the central bank. Erdogan, who wants to see to lower interest rates to fuel lending and construction, said last week that a lack of government intervention in policy had left Turkey saddled with high inflation.
"The direction of relations has been clearly worrying," said William Jackson of Capital Economics in London. "Turkey and the U.S. have historically had close ties, but if you look at the events over the past months ... it suggests that relations are deteriorating and that's certainly a big concern for investors."
The currency fell as far as 3.9780 to the dollar, eclipsing a previous record low of 3.9417 set in January. It was at 3.9541 at 1111 GMT, after the central bank's measures. Against the euro, the currency of some Turkey's major trading partners , it touched a record low of 4.6711.
The lira's slide since September has been accompanied by a jump of nearly 200 basis points in short-term government debt yields in the same period, a relatively buoyant time for other emerging markets and global equities.
The central bank said it would remove banks' borrowing limits on the interbank money market for overnight transactions, and increase their limit for the intraday liquidity facility -- both moves designed to shore up the currency.
An official from the bank said the weighted average cost of funding would be increased to 12.25 percent on Wednesday, up from 11.99 percent on Monday.
"All funding will be done via the late liquidity window," the official said, referring to the highest of its multiple interest rates, which it hiked to 12.25 percent in April.
Those moves were well short of the outright interest rate increase that markets want to see, said Jackson of Capital Economics.
"This tweaking at the edges has put the spotlight back onto the fact that the central bank may be facing political pressure not to raise interest rates, not to undertake a conventional response to currency weakness," he said.
U.S. authorities have charged Zarrab, together with alleged co-conspirators, with handling hundreds of millions of dollars for Iran's government and Iranian entities from 2010 to 2015, in a scheme to avoid U.S. sanctions on Iran. Zarrab has pleaded not guilty and was due to go on trial in New York on Nov. 27, although the start of the case has now been delayed by a week.
Ankara says the case is based on fabricated documents. Turkish authorities opened an investigation into the U.S. prosecutors who brought charges against Zarrab, state media said on Saturday, citing the allegations that it was based on fabricated documents.
Under a previous Turkish investigation that became public in 2013, Turkish prosecutors accused Zarrab and high-ranking Turkish officials of involvement in facilitating Iranian money transfers via gold smuggling, leaked documents at the time showed.
Erdogan, then prime minister, cast that investigation as a coup attempt orchestrated by his political enemies. Several Turkish prosecutors were removed from the case, police investigators were reassigned, and the investigation was later dropped.
The Turkish president, who has not been accused of any wrongdoing, has said U.S. prosecutors have shown "ulterior motives" by including references to him and his wife in court papers relating to the trial in New York.
The yield on Turkey's benchmark 10-year bond rose to 13.03 percent from 12.68 percent in Monday's spot trade. The two-year bond was yielding 14.21 percent, up from 13.83 percent on Monday.
Istanbul's main stock index dipped 0.5 percent in early trade, having fallen more than 2 percent on Monday. (Additional reporting by David Dolan; Writing by Daren Butler and David Dolan; Editing by Dominic Evans and Catherine Evans) ((firstname.lastname@example.org; +90-212-350 7053; Reuters Messaging: email@example.com))