Bank of Israel Intervenes as Buffett Buyout Strengthens Shekel

Billionaire American investor's acquisition of Israeli tool firm Iscar is adding to the shekel's surge against the dollar and euro, analysts say.

The Bank of Israel spent as much as $100 million intervening in foreign currency trading late Thursday after the greenback sank to its lowest in two years.

It was the third time since April 8 that the central bank had stepped in to prevent the shekel from appreciating, a trend that is threatening the competitiveness of Israeli exports.

The dollar was set at a Bank of Israel rate of NIS 3.5740 Thursday but continued its slide in after-hours trading to NIS 3.5618 – before the central bank stepped in. The U.S. currency then edged higher and was trading at NIS 3.5684 in the early evening.

The euro, which fell sharply against the dollar in choppy trading Thursday, lost more than the dollar did, weakening 0.5% to NIS 4.7071.

The euro declined after the European Central Bank cut its benchmark refinancing rate by 25 basis points to a record low 0.5%, its first cut in 10 months. The ECB left the deposit rate unchanged, but President Mario Draghi said the bank was technically ready for negative deposit rates and noted downside risks to the economy.

The shekel had been boosted Thursday after American investor Warren Buffett said his Berkshire Hathaway would buy the 20% of Iscar it didn't already own from the Wertheimer family for around $2 billion. It bought an 80% stake in 2006.

"The tax revenues accruing to the state and the conversion of the purchase amount from dollars to shekels by the Wertheimer family will increase the supply of dollars in the local currency market and strengthen the shekel," said currency trader FXCM Israel. "This is a business achievement reflecting global sentiment toward the Israeli economy and could draw in additional foreign investors."

According to FXCM, "The deal will generate more expectations for the shekel to strengthen against the dollar."

The Israeli currency has been buoyed by a decent economy and relatively high interest rates, a gap widened by Thursday's steps by the ECB. In addition, gas production at Israel's Tamar field will let the country reduce energy imports, easing demand for dollars. The worldwide weakening of the dollar amid quantitative easing by the U.S. Federal Reserve has also contributed.

"To be frank, it's hard to see how the Bank of Israel can, given the current equation, effect any change at all in the currency market," FXCM said. "With domestic and global factors all supporting the shekel's strengthening trend, the Bank of Israel is likely to prefer putting up resistance from time to time or reduce its intervention to a token minimum and wait for a better opportunity, or lie in wait for the rate to go lower to around NIS 3.50. At its current rate the market won't consent to changing direction."

Bloomberg