Treasury Spending Spree Does the Trick, Lifts Dollar by 4.4% on the Week

The treasury apparently hasn't finished tinkering with the foreign currency market, judging by the Finance Ministry's refusal to say exactly how many cheap dollars it bought up this week. Its tight-lipped approach contrasts with its previous round of greenback gobbling, in late April, which came with a detailed press announcement.

The treasury responded that because the extent of its latest intervention was not substantively different from that in April, it does not believe it was responsible for the appreciation of the dollar.

The dollar climbed against the shekel yesterday, after it was reported that the Finance Ministry was buying hundreds of millions of the U.S. currency in order to reduce Israel's external debt burden. Yesterday the greenback appreciated by 1.53%, and the representative rate of the dollar against the shekel was set at NIS 3.376. The dollar gained 4.4% for the week, climbing out of last week's 11-year record low of NIS 3.233.

The euro also appreciated against the shekel yesterday; the representative rate increased by 1.09% to 5.196, for a 3.8% rise on the week. In world markets the euro appreciated by 0.39%, and was traded at $1.55.

The treasury says it will continue to take action to reduce Israel's foreign debt servicing costs, which means that more intervention in the foreign currency market can be expected. Observers believe the treasury will also make a concerted effort to pay back the country's debts, not just swapping them, apparently in an effort to pressure Israel Bonds holders to cash in ahead of the maturity date.

The treasury's actions are motivated by the fact that 25% of the national debt is external, which means that changes in currency exchange rates affect the size of that debt. That's not a good thing, so the Finance Ministry is trying to reduce the exposure to fluctuating exchange rates. The assumption is that once again, it is swapping short-term dollar debt for shekel debt.

"The Finance Ministry is not replacing the Bank of Israel and has no intention of intervening in trading or in influencing the exchange rate," Finance Minister Roni Bar-On said yesterday, speaking from Paris in response to reports that the treasury had purchased between $400 million and $600 million.

"Monetary policy is within the scope of the Bank of Israel, and it has the appropriate tools to conduct it," Bar-On said. "The actions taken by the accountant general's office are a matter of managing the State of Israel's external debt in foreign currency and derive from its duty to manage the national debt in a responsible and effective fashion, while heeding exchange rates and the economy. This policy will be followed in the future, too, as needed.

"The governor of the Bank of Israel is aware of the treasury's actions in this sphere," the finance minister said.

BOI officials yesterday confirmed that the central bank had been apprised of the treasury's actions.

Bar-On was in Paris to attend a meeting of ministers from OECD countries, for the first time.

"In a global economy with companies that span borders, uniform standards and partnerships between regulators and supervisory bodies are essential to opening markets and maintaining stability, against the background of the current financial crisis," Bar-On told the conference.