Dollar and Euro Pull Back in Late Trading After Two-day Rally

Dealers tell TheMarker that Bank of Israel told them not to reveal market intervention

File photo: Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 23, 2017.
Michael Nagle/Bloomberg

The rally of the dollar and euro against the shekel appeared to be petering out in late trading on Wednesday.

After two days of sharp gains that strengthened the greenback to a Bank of Israel rate of 3.5880 shekels on Wednesday, a gain of 0.65%, the currency began to drop and was at 3.5661 early evening local time.

The euro followed a similar trajectory, appreciating 0.5% during the day to a Bank of Israel rate of 4.1385 before pulling back in late trading to 4.1086.

A dollar mountain
Bank of Israel foreign reserves

Dealers ascribed the shekel’s weakness to several factors, among them a big conversion of shekels to dollars by two Israeli companies and a surprise drop in the June consumer price index last Friday. “We have several factors acting together, but it’s still too early to say we’re seeing a real change in the trend,” said Lior Faust, head of forex dealing at Leumi Capital Markets, on Monday.

That comedown of the Israeli currency follows a long period of gains that only three weeks ago brought it close to a three-year high against the dollar of 3.49. ”There have been good reasons for the shekel’s strength, like [strong] economic growth and a current account surplus,” said Alex Zabezhinsky, chief economist at the investment house Meitav Dash.

“Still, the shekel doesn’t have to be the world’s strongest currency as it has been recently. There are other countries in good situations and enjoy a current account surplus. Until a week-and-a-half ago the shekel’s appreciation was overdone,” he said.

The Economist magazine’s Big Mac index, released last week, found the shekel to be undervalued against the dollar by about 10%. But the index, which measures currencies by adjusting the local price of McDonald’s flagship product to dollars, showed nearly all the world’s currencies to be considerably undervalued; Israel’s was the fifth-strongest by The Economist’s measure among 44 currencies.

Meanwhile, TheMarker has learned that the Bank of Israel has been instructing currency dealers not to reveal when it is intervening in the market, which it does periodically to stem the shekel from appreciating. In the process it has amassed more than $100 billion of foreign currency reserves and some criticism.

“The Bank of Israel told us not to talk to clients about when they are acting in the forex market,” one dealer, who asked not to be identified told TheMarker. “The central bank wants to hide what it’s doing to increase the pressure on speculators and make its efforts to weaken the shekel more effective.”

A spokesman for the bank said the instructions were not unusual and that all players in the market want their activities to be kept secret.

Meanwhile, Shraga Brosh, president of the Manufacturers Association, urged the government to in effect lock in the shekel’s weakness and help exporters, including by imposing a tax on forex trades – an idea that industrialists have been pushing for years.

“We are continuing our profession discussion with ministries on steps to support exports, for example by encouraging more institutional investment overseas, taxes on short-term forex movements, absorbing forex inflows and others, Brosh said.