Shekel Reaches 17-month High Against Dollar as Tamar Natural Gas Field Begins Production

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Israeli exporters are being harmed by the strengthening shekel, with the outlook even more troubling now that Israel has begun producing large quantities of natural gas, Ramzi Gabbay, the chairman of the Export Institute said Wednesday, urging the Bank of Israel to intervene in the currency market.

"The Israeli exporter is contending with multiple difficulties and is struggling to survive and continue exporting," he said. "Small and medium-size exporters are having difficulty coping with the chronic global economic crisis, which is causing demand and world trade to fall. The continual erosion of the real exchange rate is hurting profitability."

Gabbay spoke as the dollar reached its weakest against the shekel in 17 months, losing 0.06% to a Bank of Israel rate set at NIS 3.6180. The euro lost 0.2% against the Israeli currency to NIS 4.638, its weakest in more than two years.

The shekel has strengthened in part because interest rates in Israel are relatively high, with the Bank of Israel base rate at 1.75%, drawing in foreign capital. Israel's strong economic performance, especially vis-à-vis Europe, has also buttressed the currency. Now, with the Tamar natural gas field off the coast of Haifa starting production and providing power to generating stations and factories, demand for foreign currency from energy importers like the Israel Electric Corporation is set to go down.

Calls have been growing for Bank of Israel Governor Stanley Fischer to intervene in the currency market. During the global financial crisis when the dollar sank below NIS 3.5, Fischer did intervene, buying some $50 billion in foreign currency in the three years leading up to July 2011. Fischer has signaled he may resume dollar-buying before he leaves office in June.

But Hezi Yanushavsky, head of research at ATrade, said it does not look like that is happening anytime soon.

"The strengthening of the shekel still hasn't gotten the attention of the Bank of Israel. The big traders are continuing to test the determination of Fischer in his last weeks in office," Yanushavsky said. "The shekel's appreciation stands in contrast to the global trend, where the dollar has been strengthening or at least has preserved its level against the other world currencies."

Gabbay warned that Israel is threatened with the same decline in export competitiveness as The Netherlands suffered after natural gas was discovered there in 1959, increasing the value of its currency.
"The discovery of gas fields in Israel is a blessing for the economy and will contribute to growth and lower energy prices," he said. "However, the effect of excess supplies of foreign currency, because of shrinking demand for dollars and growing foreign currency from the expected export of gas, is likely to hurt many other export sectors quite seriously."

Gabbay warned that the Israeli currency's appreciation threatened export growth this year, which the Bank of Israel itself is forecasting to be low for a second year in a row in 2013. Last week, the Central Bureau of Statistics reported that Israel's merchandise exports had dropped by a 7.6% annual rate between December 2012 and February 2013, with industrial exports down 6.5%.

At a news conference Tuesday, Fischer urged Israel to move forward with legislation creating a sovereign wealth fund, which would invest the government's energy earnings abroad – spending only the returns accrued –
thus reducing the impact of gas on the exchange rate. Gabbay said he supported Fischer's plan.

Gabbay also proposed that the government encourage institutional investors to move more of their money abroad as a way of balancing currency demand. To do that, he said, the government should provide a safety net against sharp fluctuations in the exchange rate and lower taxes. To help exporters directly, he urged the government to expand its export-marketing and innovation funds.

Yanushavsky, however, said he believes the shekel appreciation would gradually lose wind.

"Although it's difficult to imagine the dollar's return to the level it was at a few months ago, you should take into account the European crisis, which could easily spark a wave of buying by investors of the dollar, which is regarded as the preferred 'safe harbor' asset at times of crisis and uncertainty," he said.

Israeli shekels are worth more in euro or dollar terms than for many years.Credit: Reuters
An oil rig in the Leviathan natural gas field off the Haifa coast.Credit: Albatross