Dollar Gyrations

Forex Market Roiled for Second Day After Bank of Israel Holds Rates

Dollar’s losses versus shekel over two days reach 3.2%.

Emil Salman

The Bank of Israel’s decision to hold interest rates unchanged and refrain from any quantitative easing roiled the local foreign currency market for a second day on Tuesday, as the dollar and euro both tumbled against the shekel.

The greenback lost 2.3% to a Bank of Israel rate of 3.926 shekels, bringing its losses over the past two days to 3.2%. In late trading, the dollar was 3.919. The euro also weakened to 4.3141, a loss of close to 1.4% for the day. In late trading it was at 4.2777 shekels.

Meanwhile, the Finance Ministry took advantage of the dollar’s weakness to undertake its first shekel-dollar hedging operation of the year. “Market conditions, including the shekel-dollar rate, support hedging operations as part of the annual work program of the accountant general,” the ministry said in a statement, declining to provide further details.

In 2014, the treasury conducted about 1 billion shekels ($250 million) of hedging deals.

The forex market has been in uproar since Thursday, when the British bank HSBC issued a report saying the Bank of Israel would lower its base lending rate below zero for the first time ever and begin a quantitative easing program.

The report sent the dollar as high as 4.05 shekels on Monday and the Tel Aviv Stock Exchange’s TA-25 index to a record close, even though most economists cast doubt about the HSBC report. On Monday afternoon, the central bank announced it was taking no action for now, although Governor Karnit Flug said all options remained open.

In an interview with the Calcalist financial daily Monday, Flug denied that anyone in the central bank had leaked QE or other plans to HSBC. “The way we announce our policy steps is very, very organized,” she said.

Despite the sharp dollar movements of the past two days, David Masika, CEO of the currency trader Matach24, said the dollar’s decline is a passing phenomenon.

“Its decline is just a short- or medium-term regression and its resumption of strength is inevitable,” he said. “Up through the Passover holiday, it will experience very sharp movements in the local market and an influx of pro-shekel investors in an intensive and aggressive way.”

Masika said the prevalent view in the market is that Flug will turn to negative interest rates and QE – a policy in which the central bank buys government bonds in the market to inject more money into the economy – after Passover, which ends April 10.

Alex Zabezhinsky, chief economist at Meitav Dash Investment House, said that according to his reading of Flug’s remarks, the odds of the central bank employing QE are still low. “We believe that as long as there are no exceptional circumstance, the Bank of Israel would prefer to wait to take its next step until the April consumer price index is released [on May 15],” he said.