Dollar Dives 2% Against Shekel to NIS 3.64 in Bank Trading

Analysts: Drop due to expectation of additional U.S. interest rate cuts after Fed meets Wednesday.

The U.S. dollar fell hard relative to the shekel early Tuesday in anticipation of another drop in interest rates on the American currency.

Interbank trading priced the greenback at NIS 3.64, down 1.85% against the official exchange rate set Monday afternoon.

Sources at foreign currency trading company Finotec said that the main reason for the dollar's steep decline was anticipation of an additional rate cut after the U.S. Federal Reserve's monetary meeting on Wednesday.

Last week, the Fed abruptly lowered its key short-term lending rate, the federal funds rate, by 0.75% to 3.5%, a week ahead of its scheduled meeting. The move, designed to stimulate the U.S. economy by making capital cheaper, took the markets by utter surprise, and many analysts believe that Fed chairman Ben Bernanke isn't done. Wednesday is likely to bring another half-percent rate cut, say economists.

The present interest rate on the dollar, 3.5%, is well below Israel's rate of 4.25% and interest rates in England and the European Union, commented Rodian Rahnayev, a dealer at Finotec. "On Wednesday the Fed will be announcing the federal funds rate, and meanwhile futures on interest rates are indicating a 90 percent probability that interest will be lowered by another half percent."

The dollar has been brought low by a combination of events, chiefly the subprime mortgages crisis and the ensuing credit crunch. Widespread mortgage lending to borrowers of dubious creditworthiness created a bubble in housing prices, while in parallel a vast market for derivatives based on this dubious (and other) debt was formed. When the crunch came and home-buyers began to default on their debt in droves, housing prices started to fall. That in turn led banks to hunker down, leery of lending even to each other because of the banking establishment's exposure to the mortgages market.

New home sales in the U.S. unexpectedly slumped to a 12-year low point in December, dropping by nearly 5% to an annualized pace of 604,000, the U.S. Commerce Department said yesterday. Analysts had been expecting a figure of around 640,000. Against the year before, the median price of housing in the U.S. dived by 10%, the steepest drop in 37 years.

Technical analysis indicates that the dollar will continue to weaken in the short run, despite the $150 billion economic package that U.S. President George Bush and the Congress are putting together to stimulate the economy, Finotec's Rahnayev adds.

Bush said on Friday that the United States, where stock markets have slumped and unemployment is increasing, faces the risk of an economic downturn but added that his advisers still expected growth to continue, albeit at a slower pace.

On Monday Bank of Israel governor Stanley Fischer decided to leave Israeli interest rates unchanged at 4.25% for February, even though inflation has climbed above 3%, which is the ceiling of the range set by government. The price stability target range is 1% to 3%.