Last week at the end of a boring trading day, there was an item about Bank of Israel Governor Prof. Stanley Fischer apparently telling those present at a business breakfast in New York that the world is reconciled to a weak dollar in order to ensure global recovery. Fischer said, "The dollar will continue to weaken."
To tell the truth, at first I was certain that the reporter had been quoting Fischer while eating "Crunchies," and had not hear Fischer properly. Then the Governor's words were quoted on dozens of sites and I understood that that was what Fischer really said.
Even so, there is no absolute contradiction between Fischer's statement and his words a month ago when he promised that the US currency will not continue to weaken all the time and that the wheel will turn. Cynics will say that Fischer is covering himself for all possible scenarios on the world's foreign currency exchanges.
So back to Fischer's latest statement. With all due respect to Fischer and I have the greatest admiration for him, I have many reservations about his words. Firstly, in a market controlled by huge funds and which the scope of speculative deals is decisive, there is no point in trying to guess future directions using economic logic. Just 24 hours went by and suddenly the dollar rose 2% against the euro and 5% against the yen. This trend could continue for a week but any guess is as good as another.
Secondly, Fischer's recent comment takes into account that the world is looking at the US economy and hoping that it will recover, and that recovery depends first and foremost on a weak dollar. I agree with the assessment that the US is the dog wagging its tail but from the point of view of a healthy economy it is not a weak currency and if economic stability and recovery depends on this then we are in trouble.
Post recession America must stop relying on financial virtuosity as expressed by the investment banks, and must start rebuilding an economy based on creating jobs and salaries.
Thirdly, and most importantly of all, I have no doubt that the world is reconciled to a weak dollar. But is Fischer talking about reconciliation with the current exchange rate of the dollar, or an additional weakening.
It is unlikely that many countries in the world are reconciled to a weak dollar from China and Vietnam to Switzerland and Romania. And what about Israel? Are we reconciled to a weak dollar? It doesn't look like it if we take into account the policies of the Bank of Israel over the past two years.
The real economy is suffering badly from the financial virtuosity of the investment banks and hedge funds. I take my hat off to Bank of Israel Deputy Governor Prof. Zvi Eckstein who in an interview with "Yediot Ahronot" over the weekend called a spade a spade. He said, "We have related to the dollars coming into the economy from a purely speculative point of view as a poisonous asset polluting the economic body, weakening it and making it difficult to function."
The scope of this poisonous asset, I claim, is huge; many billions of dollars not brought to Israel for investment in a stable economy. In recent months the Bank of Israel has again been waging a war against speculators, and its new policy since August has surprised many and caused them to sit on the fence.
This tranquility is only temporary and we received a small indication of this last week when for one day the dollar crossed the NIS 3.81/$ point. By the evening it was back down to NIS 3.77/$. If the trend will indeed change and the dollar will continue to strengthen we can call game over next time. If the dollar continues treading water, it is only a matter of time until until speculators will try to test the resolve of the Bank of Israel.
Eckstein also said, "While the changes in the shekel exchange rate do not stem from the import export balance, but the movement of capital to Israel then Israel's real economy can be affected badly and the Bank of Israel will work to neutralize these influences and will continue its intervention."
Yediot Ahronot summed up the bottom line by saying, "Speculators you have again been warned. And I add, "Bank of Israel, you also be warned and be on your guard.
As of today there is virtually no foreign bank operating in Israel that does not hold a shekel position against the dollar. An additional attempt to strengthen the shekel is just a matter of time.
Yossi Frank is a financial consultant and CEO of Energy Finance
Published by Globes [online], Israel business news - www.globes-online.com - on December 7, 2009
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