The Dollar Dive / No Crisis, No Disaster

In June 2002 Israel went into panic mode when the dollar climbed to an all-time high of five shekels. Everyone wondered whether it would break the five-shekel psychological barrier and reach six to the dollar.

Then Bank of Israel governor David Klein and finance minister Silvan Shalom were also concerned. They held an extraordinary meeting on June 13 that was followed by the announcement of a mini-economic plan consisting of deep budget cuts and interest hikes. The dollar turned and fled and the five-shekel barrier was not breached.

Today, Israel is in a panic over the declining dollar, which is approaching the 4.1 mark and will soon reach the psychological barrier of four shekels. And who knows, maybe it will drop below NIS 3 to the dollar, and then where will we be?

First of all, there's no comparison between the two cases. In 2002 we were in real economic crisis, with intifada-spurred recession, a large budget deficit and complete lack of trust in the currency and the economy. There was a genuine need for serious economic measures to slow the dollar's climb and head off high inflation and economic instability. But now?

There is no crisis. The dollar is weak against all currencies: the euro, the pound sterling, the Brazilian real and the Indian rupee, Poland's zloty and the Czech Koruna. The dollar is weak because the U.S. balance of payments deficit is $800 billion and the dollar must weaken to close the gap.

If we also consider that in recent years Israel's inflation rate has been lower than that of the U.S. - we have a $7 billion balance of trade surplus and are taking in billions of dollars every year in foreign investments - we see that we have a surplus of dollars. Just as with any other commodity, that drives down the price until a new balance is achieved.

Have we reached that balance?

Hard to say, but because the process isn't over then neither is the drop, in all likelihood.

So who suffers from the dollar's free fall?

Mostly exporters, who receive less for their goods, and mainly in traditional industries that have also been hurt by the rise in the minimum wage. They will have to become more efficient and search for new, non-dollar markets. Technology is less sensitive to dollar fluctuations because the profit margins in this industry are much higher.

The danger of inflation going below its 1 to 3 percent target rate is also not a real danger, since zero inflation is not so bad and can even be good; it protects people's buying power.

Will Bank of Israel Governor Stanley Fischer stop publishing the representative exchange rate?

He has said the central bank has discussed it, but in truth it wouldn't solve anything. The dollar isn't dropping because the Bank of Israel is or isn't publishing the representative rate. In any event, if the public wants to link apartment or rent prices to the dollar it can do so without Fischer.

The public could, for example, link rents to the Bank Leumi's cash purchase dollar rate, or the selling rate or an average of the two - which is very close to the present representative rate.

Artificial measures such as ending the publication of exchange rates will not change the behavior of the public. The only thing that will end the dollar linkage is if the public believes that inflation is gone forever.