June 13, 2019 / 1:33 PM / 3 months ago

UPDATE 1-Lira weakens after Turkey says it will not back down on S-400 deal

(Adds central bank data, analyst comment, details, background)

ISTANBUL, June 13 (Reuters) - Turkey's lira weakened some 1.5% on Thursday after Ankara reiterated that it was unwilling to back down from its purchase of Russian missile defence systems, despite pressure from Washington.

The dispute between the NATO allies has set investors on edge, sending the lira down nearly 10% this year, mainly over concerns that Ankara's purchase of the S-400s will lead to sanctions from Washington.

Despite pressure from the United States, including a letter that relayed to Ankara that it would be removed from the F-35 fighter jet programme if it accepts delivery of the S-400s, Turkey has refused to take a step back.

The lira's decline steepened on Thursday after Foreign Minister Mevlut Cavusoglu said U.S. acting Defence Secretary Patrick Shanahan's letter would not make Turkey back down from its decision.

The lira stood at 5.89 against the dollar at 1300 GMT, nearly 1.5% weaker than Wednesday's close of 5.8050. Earlier, it weakened as much as 5.9030.

The currency had recovered some ground in recent weeks, partially over optimism that Ankara and Washington would come to an agreement regarding the deal. However, the latest comments from Ankara have reversed that trend.

Cavusoglu's response to the letter came a day after President Tayyip Erdogan said the S-400 deal was definitely done, adding Ankara would challenge its removal from the F-35 program on "every platform."

Turkey's lira remains the "weakest link" among emerging markets currencies, despite its impressive gains earlier this month, said Piotr Matys, an emerging markets forex strategist at Rabobank.

"Comments from the Turkish President imply that his country remains determined to receive the delivery of the contentious S-400s from Russia despite being warned by the U.S. that this could lead to sanctions," he said in a note.

Separately, investors have been concerned over increasing dollarisation of deposits in Turkish banks, due to a lack of confidence in the lira stemming from last year's currency crisis.

Forex deposits and funds including precious metals held by Turkish local individuals and institutions reached a record high of $185.81 billion in the week to June 7, data from the central bank showed on Thursday.

The bank's gross forex reserves stood at $74.9 billion, while its net international reserves stood at $28.48 billion as of the same date, data also showed.

Turkey's main share index fell 2.05%, while the banking index declined 2.77%. (Reporting by Ali Kucukgocmen; Editing by Daren Butler and Janet Lawrence)

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