Dollar Slumps to 6-week Low Despite Treasury’s Hedging

Bank of Israel chief hints at further measures to weaken shekel.

The dollar sank to its lowest level against the shekel in nearly six weeks on Tuesday, even as the treasury bought some $250 million of the U.S. currency.

The dollar weakened 0.12% of its value against the shekel to a Bank of Israel rate of 3.488 as Israeli exporters sold the dollar to meet their local expenses. That marked the greenback’s lowest level against the shekel since January 24, and a drop of 1.7% since its most recent high on February 6 of 3.549 shekels. By late Tuesday the dollar had lost more ground and was trading at 3.4815 shekels. The euro dropped 0.17% to a Bank of Israel rate of 4.7998.

The dollar’s decline came despite the fact that the Finance Ministry’s debt management unit carried out a hedge deal for the purchase of $100 million of the U.S. currency on Tuesday, in an effort to shield the country from currency swings and to help out the Bank of Israel. The $100 million hedge transaction followed a similar move on Monday in which the ministry bought $150 million, following a two-month hiatus. The British pound also declined against the shekel on Tuesday.

The yen fell against the dollar and the euro after signs that Russia may be seeking to avoid further escalation of its military involvement in Ukraine pared bids for safe-haven currencies.

“Activity early in the month, when exporters need to sell dollars to meet their salary expenses, has continued to pressure the exchange rate,” said Yossi Fraiman, CEO of Prico Risk Management & Investments. “The dollar’s decline is likely to be halted in the area of 3.45 to 3.48 shekels, the range at which the Bank of Israel acted most recently,” he said, saying that that level “serves as a kind of red line to exporters fighting to maintain export profitability and future activity in the Israeli market.”

Exporters have been urging the Bank of Israel to take steps against the strong shekel, which makes Israeli products and services less price competitive in foreign markets and cuts into their profits. In addition to regular dollar buying in the forex markets, the central bank last week lowered its base lending rate from 1% to 0.75% for March, a move aimed in part at depressing demand for the shekel. Last year, despite purchases of $5.3 billion in dollars and other foreign currencies, the shekel surged in value by 7.5% against the greenback.

Speaking at the TheMarker Financial Conference on Tuesday, Bank of Israel Governor Karnit Flug hinted that she would not let up on the dollar purchases. “As I have said in the past, we are not indifferent to the exchange rate and are well aware of its impact on exports and employment,” she said, and signaled that the huge foreign currency reserves the central bank has amassed by buying dollars would not deter her. “There are instances in the world that show that high levels of reserves reduce the risk of a financial crisis.”

Fraiman said the central bank might go as far as lowering its base rate again, especially if the U.S. Federal Reserve holds its rate steady and the European Central Bank cuts its rate to fight off incipient deflation. Slowing Israeli economic growth would also justify another rate cut.

”The local currency market presents a challenge to the Bank of Israel and as the responsible adult,” he said. “The bank has to show tremendous creativity so as not to rattle the value of the local currency needlessly.”

AP