fischer - Finance Ministry - October 8 2010
Fischer, left, and Steinitz opening the Bank of Israel’s new office in New York on Wednesday. Photo by Finance Ministry
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Yesterday was one of the most dramatic trading days ever for the Israeli forex market. At 9:30 in the morning, which also happened to be 3:30 A.M. in Washington where the governor of the Bank of Israel Stanley Fischer was, his phone rang. His staff in Jerusalem woke him to update him on the out-of-the-ordinary opening of foreign currency trading back at home.

The dollar had already dropped 1% and was below the NIS 3.57 level as various speculators and foreign institutional investors bought huge quantities of shekels.

Fischer, who is in Washington for the annual meeting of the International Monetary Fund - as is Finance Minister Yuval Steinitz - decided immediately to intervene and buy greenbacks, and in Jerusalem they followed his orders. All told, the central bank bought some $650 million yesterday, $500 million in the morning to stop the dollar's plunge when it had hit NIS 3.569, and then another $150 million to continue propping it up. The morning intervention managed to slow the dollar's decline and hold it at around NIS 3.60, but not for long.

Foreign investors waging war against BoI

Forex traders were quoted as calling the situation a "war" between foreign investors and the Bank of Israel.

In the end, the dollar-shekel representative rate dropped below NIS 3.60 and was set at NIS 3.591, about a 0.3% fall from Wednesday. The dollar later slipped even further, down to about NIS 3.58 in late trading in the evening hours, after the representative rate had been fixed. This followed Wednesday's drop of over 0.5% in the dollar's value against the shekel.

In global markets, the euro rose to over $1.4 but slipped back in later trading. The dollar also took a beating against other major currencies such as the Swiss franc.

Of course the real reason the dollar is dropping in Israel has little to do with the shekel. It is because the dollar has been plunging all over the globe due to the weakness of the American economy. Fischer did play a part in the most recent round when he raised October interest rates to 2%, increasing the gap between the U.S. and Israeli rates to 1.75%, strengthening the Israeli currency - and drawing in more foreigners who want to put some of their money into shekels. The European Central Bank's interest rate is only 1% and Japan's central bank has lowered rates to almost zero, making Israel an attractive place for speculators to invest.

So far in October, the central bank has bought up about $1.05 billion on the forex market, including some $650 million yesterday. The Bank of Israel announced yesterday that its foreign currency reserves as of September 30 were $66.26 billion. The central bank bought $699 million in September.

Intervention is a double-edged sword

Many analysts and traders seem far more worried than Fischer about yesterday's forex battle. There are also those who think that in the long run, the dollar's moves will not have much to do with Fischer's actions.

"As we expected, the Bank of Israel entered the market with a massive intervention when the exchange rate hit NIS 3.58 per dollar," said Joseph Fraiman, CEO of the Prico Group investment house.

"There are senior economists close to the central bank who support raising the country's foreign currency balances to $100 billion, from the $65 billion held today. At the same time it is important to remember that Stanley Fischer is trying to maintain a delicate balance, which is difficult. Exchange rate stability from massive intercession in the market could be a double-edged sword because it means pouring shekels into the economy. This could cause a spike in inflation, necessitating another interest rate hike, and further widening the gap between domestic interest rates and those in foreign countries that can't raise theirs," said Fraiman.

"Everyone is selling dollars," said one source in the forex market. "Right now trading has stabilized at around NIS 3.593 per dollar, not because of the central bank's activities, but due to market forces."

Oren Eldad, CEO of Clal Forex, explained that what mainly affects the dollar is not its value relative to the shekel, but its weakening throughout the world. "Fischer is trying to give artificial respiration to the dollar, but the limited means available to the central bank no longer work. The U.S. dollar is weakening against most world currencies. We can see the price of gold going through the roof - another indication that investors worldwide are getting rid of dollars and exchanging them for gold, which is considered to be more secure."

"The central bank was aggressive today," said one trader at Israel Discount Bank. "Nevertheless, Fischer's actions didn't make much of an impact."

According to the trader, foreign banks are continuing to sell off their dollars.

Earlier this week, Fischer said: "There is no doubt that without intervention the shekel would be much stronger. But we are not China - we are not going to buy $500bn next year."

High-tech exporters warn of collapse

Meanwhile, the heads of Israel's high-tech industry are becoming very worried about the dollar. For many high-tech exporters the U.S. is their main market, and they have no choice but to sell priced in dollars. The problem is that they pay their workers' salaries in shekels and have many other shekel costs, and the shrinking dollar is quickly having an effect on their bottom line.

Shlomo Wachs, the head of the Association of the Electronics and Software Industries, compared the situation to the mid-2008. In July of that year, the dollar hit NIS 3.24. He said international companies could no longer afford to absorb the costs of producing in Israel.

"I'm not going to give advice to the government, and certainly not to the governor of the Bank of Israel. But if they do not do something we may find ourselves in a situation where thousands of jobs are lost and international [research and] development centers are closed. There's no reason to pay American salaries in Israel," said Wachs.

Fisher and Steintz: A united front

The IMF meeting officially starts today. There may have been a bit of tension between Fischer and Steinitz the past few weeks, when Fischer ignored the Finance Minister's calls not to raise interest rates. But in Washington the two are going out of their way to show cooperation and business as usual, just as they did on Wednesday when the two inaugurated the central bank's new office in New York.