Yet another unnecessary intervention

The latest move by the Bank of Israel has no value.

The latest pronouncement by the Bank of Israel that it is increasing daily dollar purchases to more than $100 million is astonishing. Fischer has already proven that he is brilliant, and therefore he certainly understands that intervening in the foreign currency market does not influence either short-term trading or the future.

The main factor influencing the dollar-shekel exchange rate is the value of the US dollar in the global trading of currencies. Local considerations that can also influence are an irresponsible state budget, a problematic security reality or a real change in the regulatory environment, which the Bank of Israel chose not to implement.

Today's move has no value in the medium term either. In the very short term the announcement can push the exchange rate up as we have seen over the past twenty minutes when it has risen from NIS 3.74/$ to NIS 3.82/$. But this will not hold for more than a week or two and for sure it will have no long term impact.

Therefore, we can understand that the announcement is meant to put psychological pressure on the market and show the foreign banks that somebody is managing matters. At the same time the measure is designed to prove that the Bank of Israel is working on behalf of exporters, against the backdrop of the meeting between Minister of Finance Yuval Steinitz and Manufacturers Association President Shraga Brosh on ways to weaken the shekel.

In recent months the Bank of Israel has discussed exit strategies from the daily foreign currency purchases after the country's reserves surpassed $50 billion. This is far above the original plan of ending the purchases when the reserves reached $40 billion.

However, the strengthening of the shekel in recent weeks has put manufacturers under pressure, and this pressure has been passed onto Fischer by Steinitz and Brosh.

In fact, instead of benefitting the exporters and harming speculators, Fischer rewards the speculators with volatility.

Meanwhile, exporters do not care about market prices in the short term. What is important to them is the change from month to month as well as stable prices and certainty. They would prefer a fixed exchange rate. So from their point of view this latest announcement hurts them and raises the risks in the business environment.

From a financial point of view this announcement is unnecessary and once again politics has been triumphant.

Tal Avda is Clal Forex VP investments

Published by Globes [online], Israel business news - - on August 3, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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