Dollar - Bloomberg - Sept. 30, 2010
Is anyone celebrating the fall of the dollar? It seems not in Israel. Photo by Bloomberg
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The shekel continued to strengthen against the dollar on Wednesday on the eve of the Simhat Torah holiday and the representative rate was set at NIS 3.665, down over 0.3% from Tuesday. But in interbank trading yesterday the dollar fell even further with exchange rate deals in the range of NIS 3.62-NIS 3.63. That is a drop of over 1% from Wednesday.

Despite yesterday's holiday, foreign banks traded shekels among themselves and with such customers as international hedge funds and other investors. Local investors did not participate in forex trading yesterday.

The reason for the continued rise in the shekel is increased demand after the governor of the Bank of Israel, Stanley Fischer, announced on Monday he was raising October interest rates by 0.25% to 2%.

The dollar has now fallen over 7% against the shekel since the beginning of July.

The shekel has been climbing against the dollar almost without a break for the past few weeks, and not only due to Israeli interest rates. For example, the shekel fell by almost 0.6% against the euro on Wednesday to a representative rate of NIS 4.987. It is the dollar's drop in world forex markets that has earned the lion's share of its depreciation against the shekel. There has been a big demand in particular for the currencies of developing nations with growing economies instead of the dollar recently. The euro hit a five-month high against the dollar at over $1.36 and had its best quarterly gains in eight years.

All this has lead the Bank of Israel to buy up more and more dollars in recent months and years.

The Bank of Israel is not the only central bank trying to stop their local currency's rise against the dollar, and many economists are beginning to worry about a trade war as nations discover they can no longer control their currency's appreciation only by buying dollars.

Another sign of the dollar's weakness has been the rise in commodity prices and gold in particular. The price of gold is at record highs of over $1,315 per ounce yesterday, though it retreated somewhat in profit-taking. Oil prices also climbed to near $80 a barrel. All told, gold prices rose 5% in September.

Fischer to hold press conference on Sunday

In light of the sizzling real estate market in Israel, along with the big gains in the past month on the Tel Aviv Stock Exchange with the blue chip TA-25 index nearing its all-time high, and the shekel gaining strongly against the dollar; Yehoshua (Shuki ) Oren, the accountant general in the Finance Ministry said: "I do not think that the interest rate increase this week will create a turning point in the stock market or real estate."

The tension between the treasury and the Bank of Israel has been rising in recent weeks and at the beginning of this week Finance Minister Yuval Steinitz broke protocol and and called on Fischer not to raise interest rates - which he then did despite Steinitz's recommendation.

Fischer announced he will hold a special press conference on Sunday in advance of his scheduled trip to the International Monetary Fund's annual meeting, starting October 8 in Washington.

In any case, the central bank is holding firm to its recent declarations that there are fears a bubble is developing in the real estate market, and that is the main reason the central bank has been raising rates. The Bank of Israel has also used other tools, such as changing regulations to increase the cost of mortgages and other real estate loans and not just relying on higher interest rates as its only tool to slow down the rise in housing prices.

Reuters contributed to this report.