All That Glitters / Are You Prepared to Bet Against Stanley Fischer?

If you read the papers, you know this: The dollar has been wilting against the shekel, weakening by the day. The greenback is under attack and there's no telling where its slide will end. Not only the business pages, but the front pages and evening news have been showing pictures of Stanley Fischer, the governor of the Bank of Israel, with a worried look on his face.

Criticism of Fischer's foreign currency policy has been coming from all directions, including from Shuki Oren, the accountant general over at the Finance Ministry. Foreign banks have been vying to lower expectations of the dollar. Some think it will sink to NIS 3.60, some to NIS 3.50. Merrill Lynch even suggested that it might go as low as NIS 3.40. Where will it end - where?

There are plenty of reasons for the dollar to continue to shrink against the shekel. Its weakness in world markets, for one. The fact that at some point the Bank of Israel will stop buying dollars on the open market, is another. A third is anticipation that interest rates on the shekel will be rising soon, and then there's also the fact that Israel's economy is growing rapidly, compared with the rest of the world.

What thousands of investors and speculators have been doing, here and abroad, is to buy shekels, purchase protection against the dollar dropping, and bring forward any foreign currency sales they had planned anyway. The result is that last week the dollar weakened by 2% against the shekel to NIS 3.79. The euro weakened even more, by 2.7% to NIS 5.35. Yet again the shekel proved to be one of the strongest currencies in the world.

Don't expect the trend to change just yet. At the end of last week, the dollar had sunk to its lowest level in a year against six major currencies, including a 1.3% slide against the euro.

There are buyers

But wait a moment. The average daily volume of trade on Israel's forex market is about $2 billion. For every dollar sold, there's a buyer. There's somebody who's guessing against the consensus, that the dollar isn't going to weaken any more after all. For every speculator betting that the dollar will collapse, there's a gambler who thinks otherwise. If that hadn't been the case, the dollar would have dropped below NIS 3 last week.

Why are they buying? What's their analysis? What's going on in their heads? Here is the mirror image of last week's hysteria: seven reasons why the dollar could, if anything, appreciate.

A rough stock-taking shows that up to $5 billion came from the current account - this is the gap between imports on the one hand, and exports and unilateral transfers on the other hand. A far greater amount came from foreign direct investment - acquisition of companies, property and businesses. That brought in $8 billion in the last 12 months.

We have reached $13 billion. Whence the rest? Mostly from speculative currency sales. In this category we find "financial investors," such as foreign banks and hedge funds; exporters selling dollars in advance that they expect to receive in the future; and selling by Israelis who wiped out their overseas holdings during the crisis, for fear of foreign banks collapsing and taking their money with them.

But that sort of speculative income is hardly steady. It can change direction at the drop of a hat. Israelis have finished fleeing overseas investments. Now they're starting to look for opportunities abroad - for instance, in foreign real estate markets. A lot of speculators are now betting against the dollar and are in waiting mode. And a lot of exporters have already presold their anticipated dollar income for the next six to 12 months.

"The market has been cleaned out," says a speculator, who's frank about betting that the dollar's going to gain ground. "There aren't any big sellers any more. All that's needed is one international, or domestic, event that will make them buy dollars to wind down their gamble. I think we're going to be seeing a major, short squeeze this year that will send the dollar climbing."

Meaning, a lack of supply of dollars and climbing demand is a recipe for the dollar to appreciate.

There's general agreement between the Bank of Israel, the Finance Ministry, industrialists and the big unions that a dollar worth less than NIS 3.50 poses acute danger to the economy and to jobs. These people would do everything it takes to stop the shekel from rising. The Bank of Israel can keep buying dollars for months to come, even step up its pace. Legally speaking, it can even clap restrictions on the free movement of speculative money, or set an artificial exchange rate.

Observers with an eye on Fischer, in his monetary moves and in his supervision over the banks, know by now that he's a truly determined individual. He doesn't fold. Are the speculators selling dollars last week really determined to oppose him the whole way?