After more than a week of steady losses against the shekel, the dollar and euro made big gains on Thursday after the Bank of Israel pumped $600 million or more into the currency market to stem the shekel’s strength.
The dollar, which had lost 23% against the Israeli currency in the week through Wednesday, gained more than 1.5% in value by the time the Bank of Israel set the official rate of 3.688 shekels. In late trading, the dollar’s advance was holding and it was trading at 3.6949.
The euro, which had lost 33% in the previous week, also strengthened about 1.5% to a Bank of Israel rate of 3.8809. However, in after hours trading it was 3.8797 shekels.
The turnaround came after a week of battling between what many said were currency speculators and the Bank of Israel. The central bank’s policy is to prevent what it calls exchange rate changes that don’t reflect fundamental conditions – in another words speculation.
But many in the market were betting the central bank would not step in to weaken the shekel as it has in the past because years of intervention have caused the Bank of Israel to amass foreign reserves of close to $102 billion – approaching the $110 billion ceiling the bank has set.
But Andrew Abir, the head of the central bank’s market operations, disputed that view.
“We announced two years ago that the ideal level of reserves, reflecting the amount we thought we would need in case of a crisis. There’s no reason to assume today that the level is any lower than it was two years ago and not just because the economy has grown,” he said.
“I’m confident the market understands that this announcement doesn’t limit intervening in the forex market. The monetary policy committee never told the markets division: ‘$110 billion is something we can’t exceed,” Abir said.
The bank bought as much as $300 million of foreign currency on Thursday, dealers said, on top of the $300 million it bought the day before. Reuters reported that one dealer said the central bank bought $200 million, while another said it was about $300 million.
The latest gains for the shekel have rekindled debate about what the shekel’s real value is and whether the Bank of Israel’s policy of intervention taking too high a toll on the economy.
The central bank has been intervening in the market out of concern that too strong a currency will undermine the price competitiveness of Israeli exports, which are a critical part of the economy.
But even before the shekel’s made its latest gains, critics were saying that trying to weaken the shekel was imposing unnecessarily high costs on consumers, who pay more for imported goods than if the market were left alone to determine the rate.
Rafael Gozlan, chief economist at IBI Israel Brokerage & Investments, said in a commentary for TheMarker on Thursday that the intervention policy was no longer effective.
The shekel has been gaining in value on a long-term basis because the economy is performing well relative to most other developed countries. Israel has run currency accounts surpluses and its fiscal house is in order, with debt declining as a percentage of gross domestic product.
Even though the Bank of Israel’s base rate is at a historic low of 0.1%, it’s still high relative to rates prevailing in Europe and the U.S.
Gozlan urged the Bank of Israel to declare that it will not raise the rate until inflation reaches 2% annually, the midpoint of the target rate. That would imply that the rate isn’t going up anytime soon.
“A statement like that will lead to a drop in yields in the local bond market and an increase in the differential with dollar rates, which will support a weaker shekel,” he said. “That way, the bank will influence movement of financial capital – a major factor in the forex market.”