Is Fischer increasing currency reserves or intervening?
By Eytan Avriel
"The act of purchasing $5 billion in coming years by the Bank of Israel is a dramatic intervention by the central bank in the foreign currency market," said a veteran Israeli forex trader in response to the plan announced by the governor of the Bank of Israel, Stanley Fischer, last Thursday afternoon.
"I am surprised the dollar did not jump higher, to NIS 3.8 [on Friday]. We are considering switching our positions, from selling to buying dollars," he said.
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The dollar is now at NIS 3.399 as there was no foreign currency trading on Friday due to the Purim holiday, while the euro is at NIS 5.252. However, in trading between banks in London on Friday, the shekel traded in the NIS 3.43 to 3.445 range.
The Bank of Israel announced Thursday it would buy $25 million every trading day for two years, a total of $10 billion, to raise Israel's foreign currency reserves to almost $40 billion. However, the $25 million per day is a tiny sum in overall trading terms, and may not have a significant effect on the dollar.
Nevertheless, foreign currency traders and others in the trading rooms believe that the official explanation of the move, to increase the central bank's reserves, is only a cover story. They believe the true cause of the move is Fischer's desire to weaken the shekel against the dollar and other currencies.
"There are dozens of research reports on the correct level of foreign currency reserves. The Bank of Israel chose a few studies that are appropriate for its cover story, to intervene in a manner in the market in favor of the dollar," said one trader.
Another trader with a foreign bank here in Israel simply broke out laughing, and then said he had never heard of any such thing before.
However, all the traders did agree that $25 million a year would be a significant factor in forex markets. This could offset the dollar surplus from foreign trade and create a situation where normal demand for dollars is greater than the supply. Most traders also agreed that central bank intervention could tip the scale, and change the direction of the dollar. The shekel could go from strengthening to a slow depreciation as a result.
Others were also shocked by the timing of the announcement: only two hours before the close of foreign trading on Thursday, just before the weekend with the Purim holiday in Israel and Easter overseas. In practice, the announcement came just before a four-day weekend vacation lasting in practice until Monday morning.
Other traders voiced their opinion that the move could have additional major economic implications, above and beyond changing the direction of the shekel. The worries are that a rise in the dollar accompanied by an influx of money, even if it is sterilized by selling short-term bonds by the central bank, would let loose inflationary pressures - and a rapid rise in interest rates.
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