LONDON – A war in Iraq could be the trigger that sends the Turkish lira and Israeli shekel to new lows against the dollar, with both already suffering as US-led military preparations gather momentum. The broader impact across emerging markets of an attack on Iraq would depend on its impact on global risk aversion and oil prices, though analysts say the action has been so well-flagged that most emerging markets could emerge relatively unscathed. The United States, which suspects Iraq possesses hidden weapons of mass destruction, is pouring forces into the Gulf region. Iraq worries have already contributed to lira and shekel losses against the dollar this year, with the former down around 1.3 percent against the greenback and the Israeli unit down 1.6 percent, but there could be worse to come. «There is a very clear probability that once the bullets start flying there will be a knee-jerk negative reaction in both currencies,» said Alex Garrard, senior emerging markets analyst at UBS Warburg. Another bout of lira weakness could soon see it test last year’s record low level of 1.737 million to the dollar from current levels around 1.68 million. The shekel is also within range of its all-time low just above five per dollar. It currently trades around 4.80. Most analysts are agreed that the markets most vulnerable to major instability emanating from Iraq are those that lie in close proximity to it. «In the emerging markets universe, only the shekel and the lira have seen significant pressure so far… countries that are very close to Iraq are feeling the heat more than others,» said Amir Ben-Gacem, emerging markets analyst at HSBC. Turkey’s vulnerability is rooted in its fragile economic state following a financial crisis in 2001 while the government is still saddled with hefty debt obligations. As a NATO member, Turkey is likely to be called on by the US for a large and costly military contribution; diplomats have estimated that a war could cost Turkey anywhere between $4 billion and $15 billion. In return, Turkey will expect major financial support, but investors are already starting to worry this might cause the government to lose sight of fiscal targets. «The biggest risk in Turkey this year is a situation in which the Turkish government loses policy discipline because of the belief that Washington will support it no matter what,» said analysts at HSBC in a research note. The prime risk for the shekel is that Israel is seen as a prime target for Iraqi retaliation in the event of an attack. However, the outlook for the lira and shekel is not one of unmitigated gloom. Garrard at UBS said both may be able to bounce back quickly after an initial sell-off. «Most people view Iraq as a risk we need to get over with, and some may take a knee-jerk negative reaction as an opportunity to buy at better levels.» Overnight interest rates in Turkey currently stand at 44 percent, while Israel’s key lending rate is at 8.9 percent.