Dollar rebounds on rate cut

The dollar-shekel exchange rate recovered 1.34% yesterday in response to central bank governor Stanley Fischer's decision on Monday to slash interest rates by 0.5%, rising to a representative exchange rate of NIS 3.628 to the dollar.

Lowering the interest rates to 3.75% surprised many, with economists previously arguing the pros and cons of cutting rates by just 0.25% - or not at all.

A few minutes before Monday evening's announcement, the dollar took off, trading at NIS 3.64 to the dollar. Bank Leumi foreign currency manager trade manager Tsahi Eliash described the situation as "brisk foreign currency trade and high turnovers - although trade is not frenetic." The Bank of Israel's announcement surprised the market, he added, and investors are still digesting the move.

Eliash says that the dollar is not expected to experience dramatic gains at this stage. He believes that an increase of the trading range to NIS 3.70 or perhaps NIS 3.75 to the dollar is the most that can be expected. "This is mainly a correction in the trading range rather than a fundamental change" he added. "A great deal remains dependent on the dollar's performance worldwide.

Shlomo Maoz, chief economist for Excellence investment house, said that the deeper interest rate cut is a clear signal that the central bank will not tolerate appreciation of the shekel. Maoz, who had supported further cuts in interest rates for some time, believes that the reduction was a necessity, and warded off a substantial slowdown in Israeli economy in the second half of 2008.

The Bank of Israel, Maoz said, is unable to admit that the shekel's appreciation, which has badly damaged the Israeli economy, exports and incoming tourism, is the reason behind the interest rate cut. So, the central bank used the weak global economy as an excuse to cut rates. The reasons are not important to us - the important thing is that interest rates have been lowered.