Leiderman: Odds Growing for Central Bank Intervention in Israel Currency Market

Chief economist at Bank Hapoalim, and reportedly a leading candidate to be the next central bank governor. says this will raise the risks involved in the foreign exchange market to a more reasonable and realistic level.

The likelihood of the Bank of Israel intervening in the currency market is growing, according to Leo Leiderman, chief economist at Bank Hapoalim and reportedly a leading candidate to be the next central bank governor.

"There will probably be room for a certain amount of intervention by the Bank of Israel in the foreign currency market which will, among other things, raise the risks involved in the foreign exchange market to a more reasonable and realistic level," he said Wednesday.

The Bank of Israel's policy over the years has been that long-term exchange rate trends shouldn't be resisted, especially if the trend also reflects economic fundamentals, Leiderman said.

"Intervention seemed justified, however, if exchange rate fluctuations were perceived by the professional echelons as being short-term speculative developments," he said.

Leiderman spoke as the dollar on Wednesday reached its lowest against the shekel in close to a year and a half. Concerns are growing that the shekel's recent appreciation may continue as the new supply of natural has replaces much of Israel's imported energy.

"Israel has a good reputation in international markets when it comes to fundamental factors due to its stable economic situation," Leiderman said. The starting up of natural gas production has reinforced the positive assessment of Israel's fundamentals, he said.

"Also, the prevailing belief in the capital market is that the government will restore budgetary discipline, taking action to reduce the 2013 budget deficit and generate positive fiscal performance in 2014. A certain level of uncertainty remains regarding specific steps to be taken by the new government, primarily in the budget area."

On the other hand, Leiderman stressed, part of the shekel's recent strengthening and the detachment of the shekel-dollar rate from the dollar's worldwide movement -- the dollar is gaining strength while the shekel, rather than weakening like it did during similar situations in the past, is outperforming the dollar -- reflects the existence of what he called "strong speculative forces."

"These forces have generated expectations for currency appreciation which justify themselves and feed on themselves," Leiderman said.

The shekel's exchange rate risk has recently dropped, as expressed by exchange rate fluctuations, making it easier for speculators, he said. "The Bank of Israel clearly has its finger on the pulse of the market as the appropriate professional and experienced body to make the right decisions," he said.

Ofer Vaknin