ISTANBUL • Turkey's battered lira weakened more than 6 per cent against the US dollar yesterday, after a United States warning that Ankara should expect more economic sanctions unless it hands over detained American evangelical pastor Andrew Brunson.

It has lost nearly 40 per cent of its value against the greenback this year, hit by both the diplomatic rift and investor alarm about President Tayyip Erdogan's influence over monetary policy.

Mr Erdogan, a self-described "enemy of interest rates", wants to lower borrowing costs despite high inflation.

The currency crisis has deepened concerns about the broader economy - particularly Turkey's dependence on energy imports and whether foreign-currency debt levels pose a risk to the banking sector.

"There has been no sign that the central bank will be allowed to raise interest rates significantly and return rates to positive territory," said Mr William Jackson of Capital Economics.

"Similarly, there has been no improvement in relations with the US and additional sanctions may be on the horizon."

At 0937 GMT (5.37pm Singapore time), the currency stood at 6.2499 to the US dollar, nearly 7 per cent weaker.

US Treasury Secretary Steven Mnuchin told President Donald Trump at a Cabinet meeting on Thursday that sanctions were ready to be put in place if Brunson, who is on trial in Turkey on terrorism charges, was not freed.

Mr Trump later said in a tweet that the US "will pay nothing" for Brunson's release, "but we are cutting back on Turkey!" He called Brunson "a great patriot hostage". Turkish officials say the case is a matter for the courts.

Yesterday, a Turkish court rejected an appeal to release Brunson from house arrest, broadcaster Haberturk said.

The Turkish banking watchdog has taken steps to stabilise the currency, limiting futures transactions for offshore investors and lowering limits on swap transactions.

Turkey and its firms face repayments of nearly US$3.8 billion (S$5.2 billion) on foreign currency bonds in October, Societe General has calculated.

For companies, the cost of servicing foreign debt has risen by a quarter in lira terms in the past two months.

Finance Minister Berat Albayrak, Mr Erdogan's son-in-law, told investors on Thursday that Turkey would emerge stronger from the currency crisis, insisting that its banks were healthy and signalling it could ride out the dispute with Washington.

China offered moral support yesterday, in Beijing's first comment on the issue.

In a brief statement, China's foreign ministry said: "China believes that Turkey has the ability to overcome the temporary economic difficulties, and hopes the relevant sides can ease their differences via dialogue." It was referring to Turkey and the US.

REUTERS