The dollar and euro weakened sharply against the shekel on Monday as dealers said the market was betting that the Bank of Israel would not intervene to stem the decline.
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The greenback lost more than 0.5 percent against the shekel to a Bank of Israel rate of 3.6790, its lowest since October 2014, while the euro sank 0.65 percent to 3.8942, its lowest since December 2001. In late trading the two currencies had fallen further, with the dollar at 3.6644 and the euro at 3.8887.
The central bank has spent some $500 million this year trying to stem the shekel’s gains, but the Israeli economy’s strong fourth-quarter growth, in particular a strong recovery of exports, has frustrated its efforts, said Modi Shafrir, chief strategist at Mizrahi Tefahot Bank’s financial division.
But as the central bank buys more dollars, its currency reserves are approaching the $110-billion ceiling it has set for itself. “Foreigners and others in the market are betting that the Bank of Israel will wait to intervene with dollar buying,” he said.
Alex Zabezhinsky, chief economist at investment house Meitav Dash, agreed. “The Bank of Israel has no tools available to weaken the shekel,” he said in his weekly survey of the market.
“The continued strengthening of the shekel, mainly against the euro and dollar, again raises the questions, ‘What can be done?’ . Under current economic conditions, the chances of the Bank of Israel daring to play with negative interest rates or buying bonds is pretty remote.”
The central bank said on Monday it was holding its base lending rate at 0.1 percent for the 25th month. Last week, in a report on monetary policy it said the window for lowering its base rate below zero or taking other unconventional measures was over.
Zabezhinsky held out the prospect of the United States’ raising its interest rates as a way for the Bank of Israel to get its weaker shekel. Those prospects looked better as of last Wednesday after the minutes of the U.S. Federal Reserve’s last policy meeting were released and showed policy makers saying it may be appropriate to raise interest rates again “fairly soon” should jobs and inflation data come in line with expectations.
Although Israeli exports have recovered, the continued strength of the shekel threatens the export competitiveness of many Israeli companies and could lose them sales, which is the main reason the central bank is determined to weaken the Israeli currency.
“Those who are playing and gambling on a declining exchange rate are celebrating at the expense of Israeli industry, and the victims will be the loss of workplaces for all of us,” said Yossi Fraiman, CEO of Prico Risk Management.
Fraiman said the central bank has no choice but to intervene – and on a large scale. “The Bank of Israel has to aim a bazooka at the currency market, otherwise the dollar will keep falling,” he said, urging the Finance Ministry to join in the effort.
Zabezhinsky disagreed, saying policy makers should look elsewhere to help industry. “The solution for supporting the export sector must rely on tools that work less quickly, tools that are connected with improving the Israeli business environment,” he said, pointing to Israel’s poor 52nd-place ranking in the World Bank’s Doing Business index.