Bank of Israel Chief Defends Purchase of Foreign Currency to Depress Shekel's Value

A strong shekel is of particular concern to Israeli exporters, who are faced with earning less, in shekel terms, for what they sell abroad.

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Bank of Israel Governor Karnit Flug holds up a newly designed 50 shekel banknote. September 10, 2014.
Bank of Israel Governor Karnit Flug holds up a newly designed 50 shekel banknote. September 10, 2014. Credit: Reuters

In an appearance before the Knesset Finance Committee on Tuesday, Bank of Israel Governor Karnit Flug defended the central bank’s policy of buying up foreign currency in an effort to weaken the ever-strengthening shekel. Halting the policy too soon could lead to deepening the problem of a strong shekel, she said.

A strong shekel is of particular concern to Israeli exporters, who are faced with earning less, in shekel terms, for what they sell abroad. And if they raise their prices in foreign currencies, they risk becoming less competitive. In her remarks to the Finance Committee, Flug said that in the past two years, the increase in the export of goods from Israel was substantially lower than the global rise in exports — and the strength of the shekel is a significant factor in this.

On the plus side, she said the central bank’s purchase of foreign currency makes it more difficult for currency speculators, whose activity also influences the value of the shekel. The rise in interest rates in the United States, she added, should be expected to depress the flow of capital into Israel in the short term and therefore ease the upward pressures on the shekel, the central bank governor added.

On Monday, the Bank of Israel bought up $200 to $300 million, but the dollar was down in trading on Tuesday. The representative rate was set at 3.614 shekels, off 0.138 percent for the day, and its lowest level since September 2014. But after the rate was set, the central bank again bought greenbacks, and at least temporarily boosted the value of the U.S. currency vis-à-vis the shekel, to 3.646 shekels before it settled back somewhat. The representative rate for the euro Tuesday was set at 3.9068, up 0.419 percent on the day.

Since the beginning of 2016, Flug noted, the U.S. dollar has lost about 7 percent of its value against the shekel, about 8 percent against the euro and about 22 percent against the pound sterling.

The recent strength of the shekel against the dollar comes despite the strength of the dollar against other currencies, with expectations of an interest rate increase by the Federal Reserve. But the shekel is also being propped up by other factors, including good macroeconomic data and a low jobless rate.

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