Decision on Keeping Interest Rate Stable Sends Greenback Swooning

The forex market experienced a little drama as the dollar lost three agorot in after-hours trading, shortly after the Bank of Israel announced it was holding interest rates steady

A logo sits on display outside the headquarters of Israel's central bank in Jerusalem, Israel, on Monday, Aug. 19, 2013
Bloomberg

The forex market experienced a little drama on Wednesday, as the dollar lost three agorot in after-hours trading, shortly after the Bank of Israel announced it was holding interest rates steady.

The greenback had closed the day up at 3.643 dollars per shekel. The representative rate was set at 2:30 P.M. and remained at that level at 4 P.M.

However, the central bank announced that it would not raise interest rates, and the dollar quickly reversed course, falling 0.8% to 3.612. While the central bank signaled the possibility that it would raise interest rates because inflation is rising closer to the bottom edge of its target range, it is hard to find in its statement an economic reason for such a swift and palpable strengthening of the shekel.

Yonatan Katz, an economist for Leader Capital Markets, said that the statement was mainly hawkish.

The Bank of Israel telegraphed a kind of feeling that it will raise interest rates soon, but caused the opposite result,” he said. “It was important for the governor to make a show as if the shekel is stable, and that its appreciation stemmed from the fall of the Turkish lira and other currencies among developing nations. In practice, the bank didn’t mention at all that the July consumer price index was surprising low (o% versus analysts’ expectations of 0.2-0.3%)”

Yossi Frank, CEO of Energy Finance, put it down to speculation, which he says continues to strengthen the shekel without economic reason from when it was trading at 3.70 shekels per dollar. “Even if interest rates in Israel go up in the future, it will still be much lower than in the United States, which continues to rise,” he said.

“There is also total evasion by the Bank of Israel. While it points to inflation settling along the lower target and the risk that would prevent raising interest rates is appreciation of the shekel, the traders are pouncing on the shekel and strengthening it sharply.”