Adds analyst comment, background
ISTANBUL, Oct 27 (Reuters) - Turkey's lira weakened to a record low against the dollar on Tuesday as Ankara's relations with its Western allies soured and the central bank did not raise its policy rate last week.
The lira TRYTOM=D3 stood at 8.1560 against the dollar at 0842 GMT, its weakest level on record, compared to Monday's close of 8.0900. The currency has lost some 27% of its value so far this year.
Piotr Matys, senior emerging markets forex strategist at Rabobank, said the low lira and the fading prospects of an economic recovery after the coronavirus pandemic was a "toxic mixture" which could lead to a full-scale crisis.
"Urgent action is required to stabilise the lira and prevent further damage to inflation, the real economy and to preserve what is still left from Turkey's image as an attractive country to invest," he said in a note.
Strains in ties with the United States, a row with France, a dispute between Turkey and Greece over maritime rights and the conflict in Nagorno-Karabakh have all unsettled investors.
Turkey's testing of the Russian S-400 missile defence system has strained relations with Washington, while a personal dispute between France's Emmanuel Macron and Turkey's Tayyip Erdogan led Paris to recall its ambassador from Ankara.
Ankara is also at odds with Greece over ownership of natural resources in the eastern Mediterranean.
Implied volatility derived from options on the dollar-lira currency pair TRY1MO=FN reached its highest in 10 weeks after lira weakness.
The central bank left its key rate at 10.25% on Thursday and raised its late liquidity window to 14.75%, saying significant tightening in financial conditions had already been achieved after steps to contain inflation risks.
All economists who contributed to a Reuters poll expected the central bank to raise its policy rate in the face of lira weakness triggered by concerns about double-digit inflation and the central bank's badly depleted FX reserves.
Turkey's banking watchdog, BDDK decided to revise the required asset ratio calculation for banks on Monday, a move economists said will open up room for manoeuvre for banks in the environment of tighter financial conditions.
(Reporting by Ali Kucukgocmen and Ezgi Erkoyun Editing by Dominic Evans and Angus MacSwan)
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