Markets Fear Central Bank's Buy of Dollars Won't Stop U.S. Plunge

On Wednesday, Bank of Israel bought dollars in move slated to strengthen greenback against the shekel.

The central bank surprised financial markets Thursday by intervening in foreign currency trade for the first time since 1997.

In response to the dollar's three percent fall against the shekel from a representative rate of NIS 3.48 on Wednesday to NIS 3.35 Thursday afternoon the Bank of Israel bought dollars in a move slated to strengthen the dollar against the shekel, despite the American currency's plunge on global markets.

The currency market is readying for another day of trading in dollars, while sources in the market expressed concerns that the move by Bank of Israel Governor Stanley Fischer will not succeed in blocking the further drop in the dollar exchange rate.

The move came as a shock because Fischer and Bank of Israel foreign currency department head Barry Topf had previously said it was unlikely that the bank would intervene in the currency market.

The Bank of Israel stubbornly refused Thursday to say how many dollars it had purchased. Its announcement said that "in light of the exceptional behavior of the shekel exchange rate in recent days, the Bank of Israel has purchased foreign currency during trading."

The bank also refused to say whether it would continue to intervene in coming days.

After the central bank started buying dollars and news of the move leaked to market players, the dollar rebounded against the shekel by over a percent, to reach NIS 3.43.

The intervention caught the Finance Ministry by complete surprise. Finance Minister Roni Bar-On and other senior officials refused to comment Thursday.

"It doesn't matter any more what the shekel does against the dollar - but what the shekel does against the euro and the yen," the investment manager of one of the branches of a foreign bank operating in Israel said yesterday. His comment reflected how little relevance the dollar now has to the strength of the Israeli currency, as a result of the steep declines in the American greenback in recent months.

On Thursday, the shekel also rose against almost all other currencies: the euro-shekel exchange rate fell 1.7 percent to NIS 5.25, and the British pound lost 1.5 percent Thursday against the shekel to a representative exchange rate of NIS 6.92.

Nevertheless, the shekel has stayed stable against the euro in the last year.

Even a Federal Reserve announcement of a $200 billion borrowing plan for U.S. banks, which stirred Wall Street to 4 percent gains on Wednesday, did not impress foreign currency markets.

It seems that foreign exchange markets are preparing for an expected 0.5 percent interest rate cut from the Fed next Tuesday. This will reopen the gap between U.S. and Israeli rates to 1.25 percent. Fischer will announce April interest rates on March 24. It is clear that the pressure on Fischer from the business sector, in particular manufacturers and exporters, to lower this gap between the dollar and the shekel will only increase as that date approaches.