All That Glitters / Offset That Drooping Dollar

On Friday the greenback tumbled to NIS 3.365. So what should you do?

On Friday, while everything was quieting down for the weekend, the shekel strengthened further against the dollar. It jumped to NIS 3.365, an increase of just under 1%. Only toward the end of trading in New York did the shekel stabilize at NIS 3.38, almost half a percentage point above the rate on Friday afternoon.

What happened? Bank of Israel Governor Stanley Fischer was interviewed by The Wall Street Journal - but that wasn't the reason for the steep fluctuation. Fischer said he wanted to intervene in the market as little as possible, but would not hesitate to halt the strengthening shekel. But that's nothing new - he has said that several times in the past.

Ben Bernanke

What did happen is that the State Street Bank and Trust Co. in the United States sold tens of millions of dollars for Israeli and foreign companies.

Usually a shekel acquisition of this size doesn't affect the market; turnover in the forex market reaches billions of dollars a day. But on Friday evening the activity in the shekel-dollar market is especially sparse because of the absence of Israeli banks, and these modest conversions were enough to bring down the dollar. The dollar's hefty decline on Friday was not a one-time occurrence; we witness it every few weeks.

Last Friday, however, was the last day of the month. Many Israeli companies convert dollars on the month's last business day to pay employees' salaries in Israel. So these conversions may have led to the strengthening of the shekel.

Yesterday there was no forex trade, but we can reasonably assume that Friday's fluctuation will be reflected, at least in part, in another move in the exchange rate.

This is a relatively small story out of all the trading events in the shekel-dollar arena, but it's part of a stronger trend. Today there is a clear consensus among currency traders in Israel and around the world that the dollar will continue to weaken.

The main reason is the minuscule dollar interest rate, compared with the Israeli rate, which has reached 3% and is on the rise - a gap that encourages investors to send money to Israel and other countries that are enjoying a combination of growth and high interest rates.

We saw this mechanism in full force on Wednesday, at U.S. Federal Reserve Chairman Ben Bernanke's press conference. He reiterated that he will maintain a low interest rate for a long time to come - and in response the dollar plummeted against other currencies.

We are also to blame

The source of most of the shekel's strengthening in recent months is the weakening of the dollar around the world. But we in Israel are also to blame, as it were. Aside from being a destination for the speculative sale of dollars based on interest-rate gaps, Israel has also been enjoying a strong influx of dollars of late.

Technology startups, for example, are attracting investments or are being sold at an impressive rate, as can be seen in first-quarter figures collected by Israel Venture Capital. No fewer than 140 technology companies raised a cumulative $479 million, a 39% increase from a year earlier. Tourism is also flourishing, with a 14.2% increase in tourist lodgings in the first quarter.

Even commodities exports - Israel's traditional business - increased by 6.2% in the first quarter despite the weak dollar. Although the Bank of Israel forecasts that Israel's current account surplus in 2011 will be similar to that in 2010 or lower, as things look now, even this figure may surprise us.

In light of the combination of the weakening dollar around the world and Israel's economic strength, it's no wonder that everyone thinks the shekel is going to rise. So what should an investor who believes in this analysis do? The following are the usual answers.

1 Buy commodities. It's almost an accounting issue: Commodities such as oil, silver and agricultural commodities are priced and traded in dollars. If the dollar weakens, and the decline is not countered by a new forecast of a slowdown in global growth that will hurt demand, commodities prices will increase.

2 Buy shares. In the United States, stocks are quoted in dollars, but the dollar's decline need not sting the value of big companies because an increasingly large portion of their revenues - about 50% at present - derives from exports in non-dollar currencies. Also, the dollar's decline leads to an increase in the stock's dollar price. And if the U.S. market goes up, most other stock exchanges around the world, including Israel's, will do the same.

3 Beware of bonds. Although Israel, where bonds are quoted in shekels, is likely to benefit from the purchase of bonds by foreigners, in a country where interest rates are on the rise, bonds - especially government bonds - carry a significant risk of decline.

4 Currency? Well, we're living in a world of shekels, a currency that is only becoming stronger. There will certainly be currencies that will strengthen more than the shekel, perhaps in Asia or South America, but it's virtually impossible to identify the winner in advance.

These are recommendations derived from the consensus, which expects a continued decline in the dollar - but on condition that this decline is moderate and gradual. Any other scenario would change the situation completely.

A swift collapse of the dollar, another economic crisis, an acute recession, natural disasters or a security crisis would all cause speculators to flee back to the dollar. All the markets would reverse direction.

These are also short-term recommendations. In the end, the interest rate on the dollar will also strengthen, and then all the considerations, analyses and recommendations will change once again.