U.S. threatens further retaliation against Turkey over pastor

Equities in Hong Kong and China recouped most of their decline while shares in Japan pared losses

Turkey, in turn, criticized the prosecution in the US of Mehmet Hakan Atilla, a top official at Turkey's state-controlled Halkbank who was convicted of helping Iran avoid USA sanctions.

The almost two-year detention of Brunson, who is being held on terror charges, has soured relations between the two North Atlantic Treaty Organisation allies and sent the lira tumbling.

"There has been no sign that the central bank will be allowed to raise interest rates significantly and return rates to positive territory", said Mr William Jackson of Capital Economics.

It also forecast that inflation will peak at 22 percent over the next four months and said the weakening lira was putting pressure on the indebted corporate sector and had considerably increased the funding risk for Turkey's banks.

The embattled lira fell three percent yesterday after a Turkish court rejected a U.S. pastor's appeal for release, drawing a stiff rebuke from Mr Trump, who warned the United States would not take the detention of Andrew Brunson "sitting down".

Turkey's currency remains steady against the dollar despite an apparent threat of possible new sanctions by U.S. President Donald Trump.

President Trump attacked Turkey Friday over its continued detention of a U.S. Christian pastor saying it had "acted very, very badly".

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.

Rob Morgan, an analyst with Charles Stanley, a stockbroker, says: "Turkish companies have binged on cheap debt, much of it denominated in dollars, so they now have a dollar debt mountain of more than $220 billion".

Turkey is reeling from a massive sell-off of its currency as Washington imposed sanctions and threatened new ones if an American pastor under house arrest isn't released.

U.S. Treasury Secretary Steven Mnuchin told Trump in cabinet on Thursday that more sanctions were ready if Brunson were not freed.

Turkey's banking watchdog has taken steps to stabilize the currency, limiting futures transactions for offshore investors and lowering limits on swap transactions.

Trump added the pastor is a "very innocent man" and "we got somebody out for him - he needed help getting somebody out of some place".

Memories of past emerging market crises, such as the Asian financial turmoil of 1997 and Turkey's 2001 crisis, haunted investors this week and prompted selling across emerging market assets as a whole. Also helping the currency were moves by Turkey this week to gain favor with European countries, including releasing two Greek soldiers and an Amnesty International human rights campaigner from prison. "They are now holding our wonderful Christian Pastor, who I must now ask to represent our Country as a great patriot hostage", he wrote. This week, Qatar pledged $15 billion in support to Turkey.

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