The dollar last week enjoyed gains against the Israeli currency of a kind not seen in more than a year, but analysts say the era of the strong shekel isn’t quite over.
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The greenback appreciated 1.8% in the first week of August, helped by the Bank of Israel’s decision last Thursday to buy some $400 million of foreign currency. By Friday, the Bank of Israel rate had reached 3.476 shekels to $1, its highest in two months, adding up to a gain for the U.S. currency not seen since May 2013.
But on Monday, the first trading day of the new week, the dollar weakened 0.12% to a Bank of Israel rate of 3.472. The euro was also weaker, edging down 0.01% to 4.6493.
Currency trader FXCM on Monday expressed doubt that the buck's rise last week signaled a longer-term trend.
The dollar's rise appears to have stemmed from "a decision by many speculators to take profits on their short positions," FXCM said. "After a number of failed attempts to break the 3.40 barrier, short-sellers surrendered and gave the signal for a sharp rise higher.” The firm also credited the Bank of Israel for defending the shekel at 3.40, effectively creating a floor for the currency.
The shekel, which in the past year has appreciated close to 4% against the dollar, is crimping Israeli exports by making them more expensive and bearing some of the blame for slowing economic growth. Industrialists have been pressuring the central bank and the Treasury to act, but neither has taken an aggressive stance.
The central bank has intervened on several occasions, on top of its routine dollar-buying, while the Treasury has bought dollars as a hedge against its foreign-currency debt. Last month the Bank of Israel surprised the markets by cutting its base lending rate to 0.5%, its lowest in five years.
In the minutes of the Monetary Committee’s decision, released on Monday, the bank confirmed that the strong shekel was a central consideration in the decision. “Committee members expressed concern over further appreciation, especially in light of the slow growth in world trade volumes,” the bank said.
In a July 22 report initiating coverage of the shekel, the Swiss bank UBS said the source of the shekel’s long-term strength isn't so much speculation as it is Israel’s current-account surplus. That surplus has been strengthened by the start of natural-gas production at the Tamar field last year and by foreign investment in the high-tech sector.
Analysts Jonas David and Michele Crema said they expected the shekel’s strengthening was reaching the end of its run. They predicted it would be trading at 3.40 in six months but weaken to 3.45 in the year.
Nonetheless, Ori Greenfield, chief economist at the investment house Psagot, warned on Monday that spot interventions and interest-rate reductions won’t weaken the shekel for the long term. Greenfield said that if the central bank is serious about weakening the shekel, it must send a clear message to the markets.
“In an interest-rate environment of zero, the most powerful tool any central bank has is its communications with the markets,” he said. “With the help of clear pronouncements, the European Central Bank stabilized the euro without buying a single bond. If the Bank of Israel wants to depreciate the shekel, it must signal the markets that it will do what is needed to change the trend.”