Big Banks Make a Killing on Central Bank's Dollar Purchases

The dollar continued its climb against the shekel yesterday, as the Bank of Israel continued to buy greenbacks.

The representative rate rose by 1.1%, to NIS 3.931, after Bank of Israel Governor Stanley Fischer shocked the markets by not only announcing that the central bank's foreign currency purchases would continue, but increasing the amounts significantly. The Bank of Israel is thought to have bought over $1.5 billion since Tuesday.

Since the central bank announced its intention to continue regular foreign currency purchases, the U.S. currency has gained 5% against the shekel, including a jump of 3.9% in two days.

The euro also rose against the shekel yesterday, by 0.7%, and its representative rate was set at NIS 5.652. On global markets, the dollar rose slightly against the euro yesterday.

"The banks' foreign currency trading rooms are taking advantage of the Bank of Israel's unusual activity in the foreign currency market," a forex trader said yesterday. "They made a killing."

Traders said the big banks' dealing rooms, particularly those specializing in foreign currency or that control a large share of the dollar-shekel trade, made millions of dollars worth of profits over the past three days, at the Bank of Israel's expense.

Since Tuesday afternoon, the central bank has bought dollars in huge quantities in line with the new policy formulated by Fischer. Yesterday, it continued buying strongly all day.

The purchases are made through the dealing rooms of the major banks.

In normal times, both commercial bodies and institutions such as the Bank of Israel use sophisticated tactics to hide buyers' true identities, by dividing their purchases into several smaller transactions and/or going through several intermediaries or brokers. The idea is to keep the market from realizing that there is a "big buyer" out there, which could spur sellers to raise their asking price.

But over the past three days, the central bank has not only bought foreign currency massively, it has done so in an open and aggressive manner. The Bank of Israel has also agreed to pay relatively high prices compared to the market price at the time of the transactions.

One trader told of a purchase in which the Bank of Israel was quoted a price of NIS 3.93 for a $10 million buy, when the market rate was in the NIS 3.90 range. Yet the bank bought, seemingly indifferent to the price. A 3-agorot gap is considered extremely unusual, the trader said.

Bank Hapoalim and the First International Bank of Israel (Beinleumi) are mentioned as having reaped particularly hefty profits from the Bank of Israel's actions. But not all banks have profited equally. Early in the week, when the purchases started, several banks were surprised and caught with short positions on the dollar - and they lost money as the greenback rose.

The central bank released data on its foreign currency reserves yesterday, and they have been growing steadily. At the end of July, its holdings hit $52.1 billion, up $2.1 billion from the end of June.

"The Bank of Israel is showing this is not just a flash in the pan," said a trader at one of the big banks. "It is serious, and its actions are trickling down to the market. But for now, there is uncertainty as to the amount the [central] bank will buy every day."

Many market players said the Bank of Israel has chosen to deliver a message that it is interested in raising the exchange rate, and is willing to do so immediately and brutally, even if it costs the central bank money.

Earlier in the week, the central bank said it would continue to purchase dollars, and "market failures" in the forex market would be met with exceptional measures. It also said exporters would have to get used to living with the dollar in the NIS 3.8 range.

Exporters have asked the Finance Ministry for aid, but the treasury is likely to decline, on the grounds that exports are not everything, and the government and central bank need to look after the interests of the entire economy, not just those of the exporters.

The Bank of Israel declined to comment on this report.