Analysis

Trump Takes Aim at Currency Warriors Like Israel

The president was talking about Japan and China, but Israel is also an example. Time to rethink policy?

Bank of Israel Governor Karnit Flug.
Emil Salman

What should bother Bank of Israel Governor Karnit Flug most, a former central bank official urging her to drop the bank’s policy of buying foreign currency to weaken the shekel, or U.S. President Donald Trump signaling what could be the start of a policy to talk down the dollar?

Let’s start with Trump. On Tuesday, in remarks about the U.S. pharmaceutical industry, the president had something to say about other countries’ currency policies.

“Other countries take advantage of us with their money and their money supply and devaluation. Our country has been run so badly, we know nothing about devaluation. Every other country lives on devaluation.”

Trump was talking about the phenomenon known as the currency wars. That’s when a country tries to weaken its own currency against those of other countries or trade blocs in order to make its exports more competitive.

President Donald Trump speaks during his meeting with House and Senate legislators in the Roosevelt Room of the White House in Washington, Thursday, Feb. 2, 2017.
Pablo Martinez Monsivais / AP

Since the speaker was Trump — whose tweets might or might not mean the start of a new policy — the world’s currency traders couldn’t remain indifferent. The internet lit up with speculation, with headlines like “Trump administration talks USD down, focus now on Fed” and “Trump just signaled the death of Clinton-era strong dollar policy.”

It’s not only currency traders wondering about what it all means. Foreign policy makers felt they also had to respond. For example, Japan’s Chief Cabinet Secretary Yoshihide Suga said Trump’s criticism “completely misses the mark.” He added that the Bank of Japan’s pursuit of monetary easing was intended to boost inflation, not weaken the yen against the dollar.

The Bank of Israel can’t be looking at Trump’s remarks with any less equanimity. Even if it officially denies it, like many other central banks, the Bank of Israel has a policy of weakening its currency against the dollar, the euro and all other major world currencies, in order to help exporters and manufacturers.

To do this, the central bank has keep its base lending rate at nearly zero for a long time, even though it means that it lowered mortgage costs and plays a big role in surging home prices that have put home ownership beyond the reach of many young Israelis.

Barry Topf, the former director of market operations at the Bank of Israel
Ofer Vaknin

In addition, the Bank of Israel buys dollars on the open market on a regular basis. This practice has boosted the country’s foreign currency reserves past the $100 million mark — a greenback mountain that has grown threefold since the policy was initiated, nearly a decade ago.

From Trump’s perspective, Israel is among the countries that is waging a currency war against an innocent United States by reducing the value of the shekel, even though the only countries he named were Japan and China.

From the Bank of Israel’s perspective, Trump’s remarks are a good reason to double down: If the president orders his officials to join the currency wars and weaken the dollar, the shekel will ipso facto strengthen — undermining all of Flug’s work to preserve Israel’s export competitiveness. It will also strike a blow against companies manufacturing for the domestic market, which will suddenly find themselves competing with cheaper imports.

Trump launched one attack against Flug’s policy this week. A second one came from closer to home — Barry Topf, who was the Bank of Israel official in charge of currency trading until he retired in 2013. Topf told Bloomberg News that the currency buying was hurting the economy and distorting prices.

Topf may no longer be at the bank, but he speaks with authority as the man who designed the foreign currency purchasing program with then-BoI Governor Stanley Fisher in 2008. His remarks could encourage other officials to speak out publicly.

No one disputes the price that the public pays for the policy of the central bank, which the bank itself acknowledges. A weak shekel increases the cost of imports as well as goods that are manufactured locally using imported inputs.

The moment the Bank of Israel stops the purchases, the shekel will strengthen and the prices of cars, gasoline, electronics, foreign travel and French cheese, among other things, will decline.

Topf chose to define the issue as a “subsidy,” but a no less accurate description would be this: Between its dollar-buying and low interest rates, the central bank is imposing a tax on the public and using it to subsidize businesses and their owners.

The Bank of Israel has good reasons for continuing the policy. It worries that without keeping the shekel weak, many manufacturers would be forced to lay off workers or even close their doors. The biggest threat is not to high-tech employees, but to workers in older industries who won’t be able to find other employment so easily. This is exactly the dilemma that other currency warriors face.

Unlike most of the other world’s fighters, Israel has an economy that’s in good shape: Unemployment is low, consumer spending is brisk and gross domestic product growth is not at all bad.

The Bank of Israel and its defenders say that these fundamentals show that its policies are successful and there is no reason to risk it all by changing course. Opponents say Israel’s good situation gives policy makers the kind of flexibility to make changes.

Without calling the debate for one side or the other, the Bank of Israel should at least undertake serious discussions about a policy that was adopted in the darkest days of the global financial crisis of 2008. It should also strive for greater transparency in its policy. If the government wants to aid exports, it can do it directly. That way, Israelis will know exactly what they’re paying for.