(Bloomberg) -- Investors in Turkish markets brushed off the latest round of U.S. sanctions, though some warned that harsher penalties could still come in retaliation to Ankara's military incursion into Syria.
The lira briefly strengthened more than 1% against the dollar on Monday and the benchmark stock index was poised for its biggest advance in more than two weeks. The rally comes after Washington sanctioned three senior Turkish officials and increased steel tariffs, putting an end to a week-long sell-off as traders braced for the American response.
Ever since President Donald Trump warned on Oct. 7 that he could “obliterate” Turkey's economy, investors have had to account for the possibility of sanctions aggressive enough to deal a severe blow to the Turkish financial system. While that didn't happen, the question now is whether Trump succumbs to pressure from the U.S. congress to take a harder line.
“It's a short-term relief,” said Piotr Matys, a strategist at Rabobank in London. “The risk that far more consequential and punitive measures could be used by the U.S. prevails.”
Read more: U.S. Urges Immediate Cease-Fire in Syria as It Sanctions Turkey
A lot also depends on how Turkish President Recep Tayyip Erdogan responds. On Monday, he said the offensive in Syria would continue no matter what. Erdogan is due to meet Trump in Washington on Nov. 13.
“I fear that Erdogan will not be able to help himself, and we will see retaliation,” said Timothy Ash, a strategist at BlueBay Asset Management in London. “If they decide to respond, tit for tat, it could get ugly with a game of escalation between the two sides.”
The currency pared its advance by 4:30 p.m. in Istanbul and was trading 0.5% stronger at 5.8968 per dollar. The Borsa Istanbul 100 Index rose 1.3%, led by nation's largest listed lenders.
To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net
To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand
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