UPDATE 2-Turkish lira trims losses, but worries over Syria persist

Turkey's lira recovered on Tuesday after reaching its weakest level in more than a month, but investors were still worried about the fallout from Ankara's planned incursion in northeastern Syria. Those worries were heightened late on Monday when U.S. President Donald Trump warned he would "obliterate" the Turkish economy if the country went too far in its planned military incursion in Syria.

The lira, which lost more than 2% of its value on Monday to close at 5.8370, recovered to around 5.8195 against the U.S. dollar by 0811 GMT, after weakening to 5.8465 earlier in the day. Trump said he would "totally destroy and obliterate" Turkey's economy if it took action in Syria that he considered "off limits," after his decision on Sunday to pull 50 American special forces troops from northeastern Syria.

The leader of the Turkish opposition Iyi Party, Meral Aksener, called Trump's threat a "diplomatic catastrophe." Turkey's main share index, BIST100, was down 1.75%. The banking index declined 2.12%.

However, the shares of cement companies that have production plants close to the Syrian border, such as Mardin Cimento and Adana Cimento, rose two days straight on expectations of reconstruction of the area. The extensive area of Ankara's planned incursion into Syria could lead to months of military activity that raises concern in the market, said one bank treasury trader. Trump's threats also kept the lira under pressure, he said.

Currency depreciation could lead to expectations of a less- aggressive interest rate cut when the central bank meets later this month, the trader said. The U.S. withdrawal will leave Kurdish-led forces in Syria who have long been allied with Washington vulnerable to the planned incursion by the Turkish military, which brands them terrorists.

The Turkish defence ministry said in a Twitter post late on Monday that all preparations for a possible military operation into northeastern Syria had been completed Tensions between the United States and Turkey have been simmering in recent months over issues including Turkey's purchase of Russian missile defence systems and disagreements over policy in Syria.

Turkey's sovereign dollar bonds came under fresh pressure, with some longer-dated issues slipping to two-week lows. Bonds maturing in 2030 and beyond lost nearly 1 cent in a second day of decline. In a currency crisis last year, the lira lost nearly 30% of its value against the dollar, partly over concern about worsening ties between Ankara and Washington.

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