Forex Traders Start Testing Frenkel

Bank of Israel intervenes, but dollar still weakens by 0.8% to NIS 3.6050

Traders asked themselves Tuesday whether the forex market was already entering the post-Stanley Fischer era, as the dollar briefly sank below NIS 3.60 just a few days before the Bank of Israel governor resigns.

“If we examine the history of Jacob Frenkel, the old-new governor of the Bank of Israel, we find that he loves real positive interest rates on one hand, and that he doesn’t like intervening in the foreign currency market on the other,” said one veteran currency trader, who declined to be identified.

“That is a situation that could dictate a future for the Israeli currency of NIS 3.20 to the dollar,” he said.

Tuesday's trading was symbolic of the final days of the Fischer era. As the governor was holding his final press conference, he gave the central bank’s dealing room one final order to make some $100 million worth of dollar purchases in a bid to stem the shekel’s strength against the dollar.

The Bank of Israel wouldn’t confirm the exact number to TheMarker, but said it was a “not a large amount.”

In the wake of this foray, the dollar regained some of its value, and its Bank of Israel rate closed at NIS 3.6050, which still represented a depreciation for the greenback of 0.8% for the day. Over the last 12 months, it has lost about 8% against the shekel. The euro lost 0.65% against the shekel, to NIS 4.7313.

Market operators said Tuesday that the source of the shekel’s strength was dollar selling after the Bank of Israel announced on Monday that it was leaving its base lending rate unchanged for July at 1.25%. Many had been expecting a rate cut, and when it didn’t happen, they bought shekels.

The dollar’s weakness against the shekel stood in contrast to its gains against the yen and euro Tuesday, after U.S. data showed that sales of new single-family homes rose to their highest in nearly five years in May, confirming that the housing market is strengthening.

The dollar rose to 97.76 yen, up 0.04% on the day. The euro fell to a session low of $1.3066, but later traded at $1.3083, down 0.26%.

Beyond this week’s developments, the pressure on the dollar stems from the huge flows of natural gas from the Tamar field, substituting for imported energy. Many traders said the dollar supply that emerged Tuesday is a way for the market to test Frenkel, even if he won’t be taking office for at least several weeks, and find out how determined he is to stay aloof.

Over the last few months, Fischer has spent some $2 billion battling speculators and keeping the dollar above NIS 3.60. Each time the currency threatened to crash below it, the central bank stepped in.

With Fischer exiting, the market is anxious to see how Karnit Flug, who will be serve as acting governor, and ultimately Frenkel, will respond. It seems likely the three will be conferring together in the next several days.