Traders Freeze as BoI Storms Market

Nobody foresaw it. The Bank of Israel yesterday violently changed direction and stormed the forex market, buying hundreds of millions of dollars in the late afternoon. The sudden surge caused bedlam in the market, as traders froze, until they could figure out what was happening.

The central bank management led by Governor Stanley Fischer held an emergency meeting yesterday as the dollar sank to NIS 3.74.

Most economists have been assuming that the central bank was going to stop the forex market intervention it began a year ago, when the exchange rate was NIS 3.20. At first the Bank of Israel bought $25 million on each business day, but it quickly quadrupled its effort to $100 million on Monday through Thursday, and $50 million on Fridays.

Yesterday the central bank stated that that it will continue to buy dollars, even though Israel's foreign currency reserves have passed the $50 billion mark. That's $6 billion above the Bank of Israel's stated target.

Barry Topf, director of the Bank of Israel Foreign Currency Department, told TheMarker, "Recently we'd noticed unusual fluctuations that didn't suit the state of the economy, or the basic conditions in the capital market. We identified unjustified exchange rates and fluctuations. Some call that a market failure."

The representative rate was set at 3:30 P.M., at NIS 3.743, a drop of 1.2% for the dollar against its Friday level. That drop was evidently the breaking point for the Bank of Israelites.

At 4:30 P.M. the central bank began its attack. Within minutes the U.S. currency had rebounded 1% to NIS 3.78. By late afternoon the exchange rate had climbed 1.5% from its level prior to the announcement. One Bank of Israel source described the move as a "hammer blow."

The Bank of Israel management also indicated that its buying blitz could reoccur on especially volatile days for exchange rates, indicating market failures.

From now on the bank will no longer be issuing announcements on the amounts it buys each day. Instead, the central bank will report the total amount of dollars it has bought only at the end of the month, and only the daily average for that month.

Does the central bank think it can counter the global trend of a weakening U.S. dollar?

"We don't think we can fight global trends. But we do know when we can help the Israeli economy and when we can't. We would not have undertaken this move if we thought it would be useless," a central bank source said.

Central bank sources wouldn't say whether they'd identified a speculative attack. But forex market sources believe the central bank does think speculators are active.

The representative exchange rate of NIS 3.8 to the dollar set yesterday afternoon does not reflect the wild fluctuations over the course of the day. Dealers say the bank's sudden surge created confusion and havoc in the marketplace, as reflected in the large spread between buy and sell quotes provided by market makers. Many traders hunkered down in a state of paralysis, waiting for the dust to settle. "Liquidity was suspended. The Bank of Israel itself asked for quotes, probably in an attempt to buy more foreign currency, but traders were worried, and simply refused to sell," one dealer said.