ISTANBUL – Turkey’s lira currency and stocks fell sharply yesterday, hurt by concerns over potential tensions between the ruling Justice and Development Party (AKP) and the secular establishment over the appointment of a new head of state. Negative US and European markets and concerns about credit markets also knocked Turkish assets, which are sensitive to changes in risk appetite. The yen, which investors borrow to invest in high-yielding assets, rallied to a one-month high, pointing to risk aversion. The lira fell as far as 1.2870 to the dollar in after-hours trade, 3.5 percent weaker than Wednesday’s close. Its official closing level on the interbank market yesterday was 1.2750. Istanbul’s main stock index fell by as much as 5.1 percent before cutting some losses to close at 52,512.38 points. Banking shares, which have soared recently on hopes that interest rate cuts this year will fuel loan growth, fell 5.3 percent. Bonds, which have also benefited from rate cut hopes, fell with the yield on the May 6, 2009 benchmark rising to 17.33 percent from Wednesday’s 17.26 percent. «Usually when there is global risk aversion the locals have been selling dollars but now they are holding still because of the presidential election,» said Murat Ulgen, economist at HSBC in Istanbul. «There’s a substantial risk aversion.» Head of foreign exchange at Fortis Ahmet Turan said the lira could go as far as 1.30 to the dollar in the short term. Turkey’s AKP, emboldened by its big election win on Sunday, looks increasingly likely to resubmit Foreign Minister Abdullah Gul as its candidate for president, risking a fresh clash with powerful army generals. Gul’s hopes received a further boost yesterday when the leader of the far-right Nationalist Movement Party (MHP) in parliament was quoted as saying his MPs would attend the voting sessions in the assembly for a new president, expected in August or September. That made it more likely that Gul, whose candidacy is opposed by the powerful army, would clinch the top job. Gul is favored by the business community. The lira strengthened around the time of the last presidential election, but then fell sharply after the army made a statement against the government. «After the MHP’s announcements the parliamentary risks have been greatly reduced. The question is non-parliamentary opposition, which continues to be a risk factor, in our view,» Goldman Sachs’s Ahmet Akarli said. The lira, which lures investors with its very high yield, hit a six-year high earlier this week, as fresh cash poured in on the back of a landslide victory by the pro-business AKP. Faced with a strengthening lira, the central bank increased this week the volume of its daily dollar-buying auctions to offset excess foreign exchange liquidity.