UPDATE 7-Turkish lira hits record low after U.S. reviews duty-free access

* Lira down more than a quarter versus dollar this year

* Sell-off sparked by monetary policy, diplomatic worries

* Duty-free access could impact $1.7 bln of Turkish imports

* Central bank reacts by tweaking bank reserve requirements (Updates record low)

ISTANBUL, Aug 6 (Reuters) – The Turkish lira hit record lows on Monday after the Trump administration said it was reviewing Turkey’s duty-free access to the U.S. market, a move that could affect $1.7 billion of Turkish exports.

The U.S. Trade Representative’s (USTR) review, announced on Friday, came after Ankara imposed retaliatory tariffs on U.S. goods in response to American tariffs on steel and aluminum.

The currency has lost 27 percent of its value this year, battered primarily by concerns about President Tayyip Erdogan’s drive for greater control over monetary policy. On Monday, it fell more than 3 percent to a record low of 5.27 against the dollar.

The sell-off prompted the central bank to step in and loosen the upper limit of banks’ reserve requirements. However, that did little to prop up the lira, which also hit a record low versus the euro.

“The best bet now is to expect further weakness in the lira – Turkey really doesn’t need this,” said Per Hammarlund, chief emerging markets strategist at SEB.

“They should be doing more to support the lira, but in my view this will continue for a while longer and the lira will take another beating here.”

VEHICLE PARTS, JEWELLERY

The U.S. Trade Representative’s office said the review could affect $1.66 billion worth of Turkish imports into the United States that benefited from the Generalised System of Preferences program last year. They included motor vehicles and parts, jewelry, precious metals and stone products.

It was unclear whether any large, listed Turkish firms would be hit. Auto parts suppliers tend to be smaller, unlisted companies. Istanbul’s main index fell 1.5 percent.

Data from the U.S. International Trade Commission showed that the biggest beneficiary of the duty-free program were auto and auto parts makers, with exports of nearly $250 million last year. That was followed by precious stones and metals, at nearly $210 million.

A USTR spokeswoman said the review was unrelated to the case of Andrew Brunson, an American evangelical pastor who has lived in Turkey for more than two decades and is charged with supporting the group Ankara blames for an attempted coup in 2016.

Relations between the NATO allies have steadily worsened, strained by differences on Syria policy and over Brunson’s trial, exacerbating the sell-off in the lira.

The central bank said its move on the reserve requirements would free up $2.2 billion in liquidity for banks. The central bank could be expected to take similar moves ahead of its next policy meeting on Sept. 13, one forex banker said.

Washington last week imposed sanctions on Erdogan’s justice minister and interior ministers, saying they played leading roles in organizations responsible for Brunson’s arrest.

Erdogan said Turkey would retaliate by freezing assets of the U.S. interior and justice ministers in Turkey “if they have any.”

“For a meaningful recovery in the lira, we’re going to have to watch the news flow,” said another Istanbul-based banker, who declined to be identified.

(Additional reporting by Claire Milhench in London, Behiye Selin Taner in Istanbul, Nevzat Devranoglu and Tuvan Gumrukcu in Ankara; writing by Ali Kucukgocmen; editing by David Dolan/Robin Pomeroy/Susan Fenton)

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