Run on Dollar Cools Down After Klein Hints at Interest Rate Hike

Greenback closes at NIS 4.50, after spiking to NIS 4.55

Veiled threats of an interest rate hike by the governor of the Bank of Israel, David Klein, cooled down the run by the dollar against the shekel, dealing room traders said yesterday.

During the morning, the dollar hit a record NIS 4.55, but later in the day it slipped back to a level of NIS 4.50 after what foreign currency dealers said was profit taking, primarily by exporters and other institutions who held dollars before the central bank's announcement of an interest rate cut two weeks ago and decided that the time was ripe to cash in.

The representative rate yesterday was set at NIS 4.513 up 0.5 percent on the previous rate. In later trading, the dollar fell to NIS 4.49.

Foreign currency traders at the First International Bank of Israel said that yesterday was the first time since the interest rate announcement that they were seeing profit taking by the business sector. However, trade in the dollar continues to be high - turnover in the American currency yesterday was over $1 billion. Players believe that the dollar will settle at a level of between NIS 4.50 to NIS 4.56.

Economists at Investec Asset Management said that contrary to fears that the shekel would continue to be devalued against the shekel, the dollar was currently `over-purchased' against the shekel and at current levels it would tend downward. This supposition was supported by a 0.5 percent gain in Shahar shekel-denominated fixed interest bonds, reflecting the prevailing sentiment that the devaluation was moderating and an ease of concerns that interest rates would be put back up.

Rami Amir, chief economist at Israel Discount Bank, published an economic review yesterday in which he said that the rate of devaluation of the shekel in recent days would slow significantly.

"It's still too early to evaluate at what level the exchange rate will settle in the immediate future, but there is no doubt that the basic forces at play in the foreign currency market at the beginning of 2002 point to a continued devaluation of the shekel: relatively narrow interest gaps, the sensitive security situation, the deep recession, the decline in foreign investments and the indecisive and unclear fiscal policy. However, the rate of the devaluation will slow."

Finance Ministry director-general Ohad Marani lashed out yesterday at Bank of Israel Governor David Klein, blaming him for the shekel's rapid slide. The treasury, he said, had wanted to lower interest rates gradually over the past few months, but instead, Klein waited, and then cut rates by 2 percent in one fell swoop. This sharp cut was a major cause of the shekel's recent freefall, Marani said.

Nevertheless, he added, the depreciation is a positive development, because it would encourage exports.

Klein retorted last night that a rapid passage of the budget would help to stabilize the shekel, as it would reduce uncertainty in the financial markets regarding where the economy, and the deficit, will be heading in the next year.

If the budget is not passed soon, he added, the central bank might need to "adjust" - i.e. raise - interest rates again.

Klein said it is still too early to predict what will happen to the shekel in the next few days, but experience teaches that the current depreciation could last several weeks. So far, however, it has not affected inflation, he said.