Turkey and the USA are now experiencing strained relations following Washington's imposition of sanctions on two government ministers for not releasing American pastor Andrew Brunson, who faces terrorism-related charges in Turkey.
The fight between the United States and Turkey could flare up even more, as the White House looks to ramp up the pressure over a detained American pastor. "The Europeans will maintain the existing objections to certain Erdogan policies and continue to voice their concerns, but that won't stop them from developing pragmatic cooperation with Turkey", he said. The Harley Davidson executives are said to be fuming with Trump as the company has lost some serious cash in the past three months.
The dollar index, which measures the greenback against a basket of six other currencies, was down 0.56 percent at 96.107, on pace for its worst daily decline in almost a month.
"There has been no improvement in relations with the USA and additional sanctions may be on the horizon", said William Jackson of Capital Economics in a note to clients, adding that the lira could see a downward trend in 2019 and beyond. Turkey's dollar bonds fell, while the cost of insuring exposure to Turkish debt rose.
Turkish Foreign Minister Mevlut Cavusoglu struck a somewhat conciliatory note, saying Turkey was ready to discuss its issues with the United States as long as there are no threats.
The Turkish banking watchdog has taken steps to stabilise the currency, limiting futures transactions for offshore investors and lowering limits on swap transactions.
But some economists have called for more decisive moves.More news: More than 70 people overdose in a single day in New Haven
Turkey and its firms face repayments of almost US$3.8 billion (S$5.2 billion) on foreign currency bonds in October, Societe General has calculated.
Turkey is struggling to stabilize its currency after it plunged to a record low in a crisis that spurred fears of bankruptcies and a spillover effect in other emerging markets if Turkish firms can't pay back high foreign debt.
Companies that for years have borrowed overseas at low interest rates have seen their cost of servicing foreign debt rise by a quarter in lira terms in two months.
Turkey's state-run Anadolu news agency said a high court in Izmir had upheld a lower court's decision earlier this week to keep Mr Brunson under house arrest.
The downgrade was triggered by what it described as a further weakening of Turkey's public institutions and a related reduction in the predictability of Turkish policymaking, Moody's said.
The latest U.S. announcement came after Turkish Finance Minister Berat Albayrak tried to soothe the markets during an unprecedented conference call with hundreds of foreign investors, insisting Turkey would emerge "stronger" from the currency crisis and would not need an International Monetary Fund bailout. This week, Qatar pledged $15 billion in support to Turkey.
Despite the political tensions, the lira rebounded some 6 percent on Wednesday, strengthening to around 6.0 to the United States dollar.