Bank of Israel Intervenes Again as Shekel Strengthens

Analysts doubt central bank can counter global foreign currency trends.

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Israeli shekels. (illustrative)
Israeli shekels. (illustrative)Credit: Reuters

The dollar and the euro both strengthened against the shekel Monday after the Bank of Israel intervened in the forex market for the second time in four days.

Dealers said the central bank bought between $300 million and $400 million Monday, the same amounts it is estimated to have purchased on Friday.

As a result, the dollar changed course Monday. At its low for the day, it had weakened as much as 0.1%, to 3.419 shekels, during trading, but after the central bank entered the market it strengthened 0.1% to a Bank of Israel rate of 3.438 shekels.

Late in the day, however, the dollar was showing weakness again, trading at 3.4249.

The euro advanced even more strongly, adding 0.35% to a Bank of Israel rate of 4.693. The euro reached 6.889 shekels in late trading.

The dollar has lost about 1.25% against the shekel in the past month, and the central bank, warned Itzik Noy of Smart Capital, faces an uphill struggle to reverse it. The world’s two major currencies — the dollar and the euro — are both weakening in forex trading.

“So long as global markets are engaged in a currency war and the consensus is that interest rates will remain close to zero, it will be difficult for the Bank of Israel to intervene so much and prevent a further strengthening of the shekel,” Noy said.

Three weeks ago, the European Central Bank’s president, Mario Draghi, cut interest rates to record lows and launched a series of measures to pump money into the sluggish euro zone economy, including charging banks for parking funds with it overnight. The U.S. Federal Reserve, led by Janet Yellen, hinted last month that interest rates in the long run would be lower than it had indicated previously.

But the Bank of Israel decided at the end of June to hold its base lending rate unchanged, at 0.75%, at least for July.

“Unfortunately, Bank of Israel Governor Karnit Flug has no tricks up her sleeve at the moment to cope with the macroeconomic policies for Mario Darghi and Janet Yellen, which means that Israeli exports are going to be hurt,” said Noy.

In addition to global interest rates, the shekel has had to contend with the start of natural gas production more than a year ago, which has reduced Israel’s energy-import bill and demand for dollars to pay for it. The shekel has strengthened about 6% in the past year.

Flug’s predecessor, Stanley Fischer, instituted a policy of regular dollar buying to offset the impact of gas.

But Yossi Fraiman, CEO of Prico Risk Management and Investments, said the policy isn’t aimed at weakening the shekel but at offsetting dollar supply when it becomes excessive. Although Israel’s Finance Ministry has conducted hedging operations against its dollar debt, including two last week totaling $150 million, Fraiman said the government was ignoring the problem of the strong shekel.

“The Bank of Israel is acting as the only responsible adult in the forex market, in contrast to the past, when the governor of the central bank enjoyed the backing of the Prime Minister’s Office,” said Fraiman. “Today, the government is acting alone.”

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