Last update - 00:00 26/04/2007
Dollar drops to NIS 4.029 despite Bank of Israel interest rate cut
By Tal Levy, Haaretz Correspondent
Even the lowering of interest rates on Sunday by the Bank of Israel has not stopped the dollar's fall. Wednesday it fell another 0.934 percent, to NIS 4.029.
The last time the dollar was at such levels against the shekel was at the beginning of October 2000. This means it is at a six and a half year low.
For now, the dollar is only 0.7 percent away from the NIS 4 barrier.
The dollar started 2006 at NIS 4.603, and has lost 12.5 percent against the shekel since then. At the start of 2007 it was at NIS 4.225, and since then it has dropped another 4.6 percent. Of course, this is not only an Israeli story, as the dollar has dropped all over the world, reaching 1.364 dollars per euro yesterday.
The Bank of Israel hopes to weaken the shekel in order to lift inflation back to the target range, which is 1 to 3 percent. After all, every 1-percent drop in the exchange rate translates into a 0.3 percent decrease in the consumer price index. The 8.5-percent drop in 2006 reduced inflation by 2.5 percent, which was the main cause of the 0.1 percent deflation last year.
The strong link between the exchange rate and local prices stems from the frequent linkage of prices to the dollar, in particular in the housing sector. Rental and second-hand apartment prices, as well as a number of other products and services such as meals at wedding halls or lawyers and accountants fees, are usually quoted in dollars - mostly a throwback to the days of hyper-inflation of the 1980s.
Bank of Israel research shows that about 90 percent of rental contracts are in dollars, even though there is no longer a real reason for such a linkage. Bank governor Stanley Fischer has called on the public to start using only shekels.
There are three main ways that the Bank of Israel could intervene and influence the exchange rate, according to Ilan Viskin, the manager of Bank Leumi's foreign currency trading room. The central bank could buy dollars, but it has stated that it will not do so. It could lower interest rates, which it is doing, but the gradual process is having little effect since it is too slow. Thirdly, Fischer could make an announcement saying he thinks the dollar is too low and he intends to try to raise it. But in the meantime, Fischer has avoided doing this.
Many analysts warned that the 25 basis point rate cut wouldn't do the trick, as it hasn't in the past. In a review of the mighty shekel, Morgan Stanley wrote that the story is not only about the weakness of the dollar in world markets, but about the strength of Israel's macroeconomics and the shekel.
Morgan Stanley analyst Serhan Cevik wrote that the Bank of Israel did not have much of a chance of influencing the forex trend through interest rate cuts. Most had predicted a 25 basis point cut, but some analysts had thought Fischer might elect to lower local rates by a full half percent: He didn't.