Now the governor has a different problem: How, and more importantly when, to stop the central bank's daily dollar purchase.
Bank of Israel Governor Stanley Fischer knows the bank met its target for increasing Israel's foreign currency reserves a few months ago. Now the governor has a different problem: How, and more importantly when, to stop the central bank's daily dollar purchase. This problem has worsened in recent weeks, with the dollar's decline in Israel and abroad. The representative exchange rate was set at NIS 3.79 at the end of last week.
The Bank of Israel had two goals in buying dollars - a declared goal and an unofficial goal. The declared goal was to increase foreign currency reserves to the accepted level in developed countries. The bank set a few targets for this, the highest of which was $44 billion. That target was surpassed a while ago, and foreign currency reserves now exceed $50 billion.
The unofficial goal was to help exports. The central bank began buying dollars at the height of the economic crisis in Israel, when exports were down 40% and the dollar had plummeted to around NIS 3.20. It is easy to imagine what would have happened had the Bank of Israel allowed the dollar to sink another 40%. Some people think the bank should not have announced how much it was buying each day, and should not have bought the same sum each day. The bank buys $100 million on regular trading days and $50 million on Fridays. About $2 billion change hands daily on the capital market in Tel Aviv, so the Bank of Israel's purchases are 5% of the daily turnover.
Exports are a long way off their 2007 and 2008 figures, and central bank economists fear that halting the purchase of dollars will send the exchange rate spiraling downward to new lows. The bank has no magic solution for exiting the dollar market, and is currently examining three possibilities.
First, the bank could lower its daily purchase volume and see how the market reacts. If the dollar stays stable, purchase volume could gradually be reduced to zero.
The second option is to buy varying sums of dollars each day, depending on market conditions. On some days the bank would buy no dollars, and may even sell dollars. The ultimate goal would be to withdraw completely from the market, except under extreme circumstances.
The third possibility is to wait until the dollar's status improves around the world, or Israeli exports increase. These would boost the dollar/shekel exchange rate and make it easier for the bank to withdraw from the foreign currency market. The problem with this option is that it requires too long a waiting period.
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