The U.S. dollar rebounded strongly against the shekel on Thursday after the Bank of Israel announced that, for the first time, it would disclose its plans for purchasing foreign currency in advance.
As part of the policy overhaul, it said it would purchase $30 billion in 2021 in order to rein in the strengthening shekel, and set that amount as the ceiling for U.S. dollar purchase this year. In 2020, the Bank of Israel purchased $20 billion.
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The dollar's relative value surged during the first hour of the day, from below 3.1 shekels to the dollar to above 3.19, or 1.9 percent above Wednesday's closing rate of 3.13. It ended the day at 3.18.
The announcement by the bank’s monetary committee came in the wake of the sharp rise in the shekel in the past year.
The shekel’s performance also reflects in part the dollar’s general devaluation against foreign currencies worldwide, but the shekel’s revaluation continued in recent weeks, mainly against the backdrop of developments in Israel that further strengthened the local currency.
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The U.S. dollar is down 2.5% against the shekel since the start of the year.
The Bank of Israel had refrained from making a substantial purchase of dollars in recent days, a move it makes sometimes to prevent the shekel’s revaluation. The central bank acquired $4.4 billion in December alone.
The Bank of Israel had never announces in advance nor set a ceiling for foreign currency purchases meant to restrain a strengthening shekel, which is said to hurt exports.
But given the understanding that the revaluation is not letting up and is not stemming from speculative financial activity, rather on long-term factors, the bank has made the unprecedented announcement to do both.
“The advance announcement regarding the amount of purchases is meant to provide the market with certainty about the bank’s commitment to manage the sharp revaluation (of the shekel) that began recently, and in that way to support down the road management of the economy with the economic repercussions of the coronavirus crisis,” the Bank of Israel said.
The bank attributed the revaluation of the shekel to “foreign currency trends that have penetrated the Israeli economy, against the backdrop of the growth in the surplus in the current account, direct investments, large-scale foreign currency sales that institutional investors are conducting as a hedge against their investment profits in capital markets abroad, and a rise in investments by foreign investors in Israel government bonds.”
The bank added investments in government bonds had also increased because Israel joined the FTSE World Government Bond Index, known as the WGBI.
Monetary committee members believe there will be a need to continue intervening significantly in the forex market in 2021 because of the coronavirus crisis. Members said the amount set aside for 2021 is significantly larger than the bank’s previous interventions, and given estimates of the increase in the current account, the purchases will moderate the revaluation forces.
The central bank also said it would announce its plans for 2022 at the end of this year.