Bank of Israel Intervenes in Forex Market in Effort to Limit Shekel's Appreciation, Traders Say

The Bank of Israel bought $100 million in foreign currency trading on Monday, marking the first time it has intervened in the forex market since July 2011, dealers said.

They said the central bank entered the market after the dollar fell below NIS 3.6 to a day's low of NIS 3.5954, a drop of 0.9% and its lowest level in 18 months. The bank's buying helped to lift the green back up to a rate of NIS 3.615, cutting its loss for the day so far to just 0.13% compared with the Friday official Bank of Israel rate.

The Bank of Israel itself had issued no formal announcement by 2:40 P.M. Israel time.

Expectations that Bank of Israel Governor Stanley Fischer would act to prevent the shekel from strengthening have grown in recent days as the currency continued to gain against the dollar. The commencement of production from the Tamar natural gas field at the end of last month will reduce the economy's need to import energy and consequently for dollars, creating a new impetus for further shekel appreciation.

The central bank and industrialists are concerned that the continued gains of the shekel will make it harder for exporters to remain price competitive. But the Bank of Israel's tools to counter the shekel appreciation are limited: The traditional one of lowering interest rates isn't feasible because of concerns that it would cause housing prices to balloon by lowering the cost of borrowing.

The Bank of Israel intervened for the three years through July 2011, but in principle Fischer and other officials have said they prefer to leave the exchange rate to be set by the market.

As a result, many traders were doubtful even in the hours before the bank stepped into the forex market that Fischer would act, especially as he is due to step down as governor at the end of June.

"It's not clear if during the transition period, moment s before he is due to depart, that outgoing governor Stanley Fischer can back up his words by intervening in the foreign currency market, especially if it means with the sour taste of a failed intervention," said trader FXCM, adding that global conditions, beyond the scope of the bank to deal with, were causing the dollar to weaken.

At Atrade, traders said before Monday's intervention that they had expected the shekel to show some weakness as investors move into dollars on concern about growing tensions with North Korea.