Dollar Plunges 2%, Hovering Around NIS 4

The dollar is plunging against the shekel again, falling yesterday 1.8% to a representative rate of NIS 4.107. Earlier in the day during interbank trading, the greenback had dropped to NIS 3.99, its first time below NIS 4 since January. In less than a month, the dollar has dropped 6% against the shekel. In late interbank trading after the official exchange rate was set, the dollar once again dropped to NIS 3.99, making the dollar's fall 2% for the day.

Despite the stormy forex trading, the Bank of Israel is determined to keep on supporting the dollar, and it is worried about the growing strength of the shekel in recent days.

Central bank sources say the dollar belongs in the NIS 4.2 range, possibly even higher. The Bank of Israel therefore feels the rise of the shekel hurts the Israeli economy.

One of the reasons the dollar has been dropping in recent days was a meeting held by Dr. Karnit Flug, the head of the central bank's research department, with senior executives of Citibank in London. The meeting was supposed to be closed, but leaked reports claimed Flug said that the Bank of Israel intends to stop its foreign currency purchases in the near future, and that the central bank is looking for an appropriate opportunity.

Flug is a senior member of the bank's management, but exchange rates are not part of her direct responsibility. The Bank of Israel denied Flug had made such statements and came out with an exceptional press release on the matter.

In its statement yesterday, the central bank wrote: "In light of reports that have appeared in the last few days, the Bank of Israel confirms that it is continuing to purchase dollars at the usual rate of $100 million a day from Mondays to Thursdays, and $50 million on Fridays. These purchases will continue until the Bank of Israel announces otherwise."

The bank reiterated what it wrote in its March 25 announcement: "The Bank of Israel announces that against the background of the world economic situation and in the context of its overall policy, the Bank will continue to purchase on average $100 million per day, as part of its program to increase the level of the foreign exchange reserves. The Bank will continue to review the program from time to time and make adjustments if and when they are required."

The bank recently completed its planned increase in Israel's foreign reserves to $44 billion, and has even increased this amount in recent weeks.

It is clear the Bank of Israel will have to stop buying up foreign currency at some point, but the bank insists the appropriate time is not now. In any case, the central bank will end its purchases only when it is convinced the step will not harm the shekel-dollar exchange rate, which the bank thinks should be in the NIS 4.2-4.5 range. Anything lower than this would harm Israeli exports.

Yesterday's dollar-shekel trading was quite volatile and most trades were in the NIS 3.98 to NIS 4.04 range, with a large wave of sales at NIS 3.99, many from foreign investors. Citibank was among those selling dollars in Tel Aviv yesterday, said sources in the forex market.

The dollar is now back where it was two months ago. Only a month ago on April 23 the dollar was at NIS 4.259, and since then it has fallen 6.1%.

What is surprising is that the dollar actually strengthened in world markets, gaining 0.3% against the euro yesterday, to $1.374 per euro.

The shekel also gained 1.1% against the euro yesterday to a representative rate of NIS 5.531, and in later interbank trading it gained another 0.4% to NIS 5.508.

In one bank forex trading room, the opinion was that the Bank of Israel will have no choice but to stop purchasing dollars soon, and then the dollar will plummet. However, another trader said this was "old news," and the only question is when.

On Monday Bank of Israel Governor Stanley Fischer will announce his decision on June interest rates. Some expect that Fischer will also use the occasion to announce a change in his policy on foreign currency purchases.