All That Glitters / Forex Roulette: Would You Challenge the Croupier?

Stanley Fischer is a factor that every speculator and money manager must consider.

Stanley Fischer must have smiled to himself on Friday night as he watched the Bloomberg monitor at his home. First of all, the Bank of Israel governor had had a pretty good week: He managed to halt the dollar's slide. After dropping as low as NIS 3.73 on Monday afternoon, the dollar closed at NIS 3.912 on Friday, an increase of 5%, or 1% a day on average.

Second of all, this week should start well for him. On Friday night in New York, the dollar shot up against other currencies in response to relatively upbeat unemployment data in America.

Even a central bank governor needs some luck from time to time, and this time, the gods of the markets were on Fischer's side. Including its appreciation on Friday, the dollar climbed last week by 0.5% against the euro and no less than 3.1% against the yen. Against the index of America's six main trading currencies, the dollar gained 0.8%, offsetting no small part of its 2.9% slide this year.

This week, as trading begins in options rooms on Sunday and then at the banks on Monday, the greenback is likely to appreciate yet more against the shekel.

But though he may have had a moment of satisfaction on Friday, Fischer faces tense times.

Last week, he stunned the markets: On Monday, he unleashed the Bank of Israel, announcing that it would do as it saw fit in the forex market. He thereby adopted a far more complex policy than his previous one of intervening through a fixed acquisition of $100 million worth of dollars on each business day.

Now, Fischer has to reconsider his moves every day. For example, say he sees the dollar inching up against the shekel today because of the tailwind from New York. What should he do? He could act against the trend - i.e., sit tight as long as the markets move in his favor, and pounce only when his dealers identify foreign currency sales against the shekel, perhaps a sign of speculators testing him. That would comply with the Bank of Israel's tactic of not fighting the international trend of the dollar, just soaking up local supplies from speculative sources.

Alternatively, Fischer could turn aggressive, buying more foreign currency in order to bolster the trend of the rising dollar. That tactic also has advantages: It would surprise the market, and it could panic speculators and send them into short squeezes. They would then need to buy dollars in order to wind down short positions on the dollar, thereby making the dollar rise further.

Probably Fischer has not yet decided what he will do. We will see on Monday, after he consults with Barry Topf, the Bank of Israel's market operations director.

Given the tremendous resources and power at his disposal, why should Fischer be tense? Because he knows that central banks have not had much success at manipulating their countries' exchange rates. Some succeeded only briefly, some failed outright. Most do not even try, as they assume they will fail.

Everything matters in this hideously complex game: movements of capital to and from Israel, speculators' faith in Israel, activity by foreign hedge funds and dealers, and major transactions. For example, the sale of Partner Communications, which is now in process, could create a spike in demand for foreign currency, because the seller is Hutchison Whampoa, which will be getting shekels for its 51% stake in the mobile services carrier but will want to take dollars, not shekels, back to Hong Kong.

There is only one thing not worrying Fischer, at least right now: the tremendous infusion of shekels into the economy.

Why? Because while the politicians are already popping corks to toast the end of the crisis, and naturally taking credit for it, Fischer is less sanguine.

Finance Minister Yuval Steinitz, for instance, announced last week that the worst is behind us and the decline in tax collection has halted, and gave himself credit for both. This happened, he said, thanks to his courageous steps at the Finance Ministry with regard to the budget, leverage funds and his firm stance against the tycoons.

All spin, and more spin. It is too soon to say that the crisis is over. Even if we have passed the nadir, it is too early to say that economic growth will be significant enough to affect the man in the street. With the population growing by 2% a year, we need growth greater than 3% for anybody to feel its effects. The real reason tax collection is recovering is that the government raised taxes and created new ones: It raised VAT and the price of water, increased excise tax on fuel, and more.

As for the credit, anybody with eyes in his head knows that Israel's relative stability is not thanks to Steinitz, but to the rebound in the markets and mounting optimism abroad. The leverage funds (which have not made a single transaction yet) are a sideshow; the budget is a crazy patchwork created by coalition politics, with no message to deliver; and the credit for withstanding the tycoons' pressure to "rescue" them belongs to the treasury bureaucrats and former finance minister Roni Bar-On, not to Steinitz. Indeed, in the "first 100 days" paper he wrote for Prime Minister Benjamin Netanyahu, Steinitz argued for helping the business barons.

Meanwhile, Stanley Fischer has not been beating any drums. At most, he says he hopes the worst is behind us. He is evidently not convinced that the rally overseas will continue. He has heard forecasts that the markets are going to dive in October and read reports about the terrible condition of America's commercial real estate market. He knows that Israel, a nation without national resources, depends on exports, and he is concerned.

Some economists think that a dollar at NIS 3 would destroy Israel's industrial infrastructure. Foreign companies would close down their local R&D centers and unemployment would explode among the middle class, the very class responsible for most of Israel's tax revenue.

It is to save the export sector that Fischer is buying dollars, and is willing to pay the price. That price includes dumping shekels into the economy and letting the banks rake in easy profits, which may be annoying but is meaningless at the national level.

The great shekel infusion is not as serious as some think. When a foreign speculator sells dollars in Israel, he does one of two things with the shekels he gets: puts them into a local bank deposit at zero interest or buys Israeli government bonds. Neither does harm, in the Bank of Israel's view. Both could even help.

Will Fischer's moves boost inflation? The central bank does not think so. What about Israel's foreign currency reserves, which have passed $52 billion and counting? Fischer actually likes that.

Maybe the worst is behind us, but nasty surprises still lurk. We will all be wiser, Fischer included, in a few months. Meanwhile, Fischer is the one man our riven political system does not dare challenge: He has printed NIS 10 billion a week and used the shekels to buy foreign currency without asking permission from anybody. Fischer is a factor that every speculator and money manager must consider: They must think carefully about whether they are willing to bet against him.