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Interest rates are not the answer Tags: Israel Up until only a few days ago, the big battle on the economic front here was over the level of Israeli interest rates. "We are being strangled by the dropping dollar, businesses are losing money and soon we will be forced to fire thousands of workers." This was a typical rant by the representatives of manufacturers, exporters and even the Histadrut labor federation. All of them demanded that Stanley Fischer, the governor of the Bank of Israel, immediately lower interest rates "to prevent speculators from making a run on the shekel." They even managed to recruit political support and started to push an incredibly stupid idea: forcing the Bank of Israel to lower interest rates through legislation. Advertisement In the end, with - or without - any connection to the exporters' pressures, Fischer surprised almost everyone and lowered interest rates by 0.5%. And what happened after he cut rates? Nothing that the exporters were hoping for. The dollar did rise 1.5% in response to the "surprise" move, and then stabilized at around NIS 3.63 for a while - a tiny, unimportant rise of about 1%. And now the dollar has lost even most of that gain in the past few days. These changes have absolutely no effect on the profits and losses of any exporter. But we have yet to hear the commentary from all those who demanded the rate cuts on how foreign currency markets reacted. After their miracle cure failed for solving the problem of the dropping dollar, they simply have nothing to say. Anyone who claims that the shekel is rising against the dollar because of interest rates or an attack by speculators on the Israeli foreign currency markets needs to realize that the global economy has changed. They need to understand that nominal interest-rate differences between countries, such as that between the shekel and dollar rates, are no longer the cause of major movements in capital. They are not the main, or even a major, cause in determining exchange rates. The reason is the world financial crisis and the incredible volatility in markets for now. This has made the carry trade - taking out credit in a country with low interest rates and investing the funds in a country with high rates - far too risky. Anyone who tried to make money off such a strategy in the past nine months lost money, and after the volatility of Israeli currency markets jumped 300%, no one is trying their hand at such a strategy in Israel. In another 11 days, on March 18, the U.S. Federal Reserve will lower interest rates by another 0.5% to only 2.5%, and once again there will be a 1.25% rate gap in favor of the shekel. It will be interesting to see whether the exporters and the Histadrut have done their homework and learned their lesson, or whether they will once again demand that Fischer do something that will have no significant effect on their problem. Bookmark to del.icio.us   State policy Olmert approves plan for 750 new homes in West Bank settlement of Givat Ze'ev. Sticking to his story Director of 'Jenin, Jenin' swears there are no falsehoods in his movie.

Today Online Palestinians: Hamas, Hezbollah cooperated on Jerusalem attack Responses: 183 Shin Bet chief: Chances of fresh Intifada are low Responses: 74 Gideon Levy: Mercaz Harav produced the rabbis who led the vilest form of Zionism Responses: 141 Editorial: Peace now, or eternal conflict later Responses: 53 Kuwaiti analyst: Best if Israel, not U.S., destroys Iran nukes Responses: 59 Jewish Agency to start anti-terror drive in wake of J'lem attack Responses: 43 More Headlines 23:30 Stricken J'lem yeshiva: PM not welcome to visit 23:04 Shin Bet chief: Chances of fresh Intifada in 2008 are low 21:17 FM to U.S. envoy: Conditions not ripe for forming Palestinian state 01:46 Amos Oz: Left wing can return to power in next elections 22:48 Minister Boim accuses IAEA chief of serving as agent for Iran 22:08 'Jenin, Jenin' director tells court film based entirely on truth 00:41 Palestinians protest Goldie Hawn appearance at JNF event 18:03 PM okays 750 new settlement homes, says fits state policy 16:38 Study: Boston's intermarried 'as observant' as Reform Jews 20:21 High Court rejects petitions to overturn Ramon cabinet appointment 00:46 Second victim of ambush on IDF jeep laid to rest in Ashkelon 00:16 Holocaust museum to honor Helena Bonham Carter's grandfather for saving Jews Previous Editions Select Day 09 mar 07 mar 06 mar 05 mar 04 mar 03 mar 02 mar 29 feb 28 feb 27 feb 26 feb 25 feb

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