The shekel, one of the strongest currencies in the industrialized world, rose to its highest level against the US dollar in more than a year yesterday. The shekel-dollar exchange rate fell below NIS 3.67/$, despite dollar purchases by the Bank of Israel.
It was another day of battle by the Bank of Israel in the foreign currency arena, and not one of its better forays.
Governor of the Bank of Israel Prof. Stanley Fischer knows that he cannot stop the shekel's appreciation, and he has explicitly said so on frequent occasions. Israel has a large current account surplus, capital inflows exceed capital outflows, and the inflow of dollars is reflected in the exchange rate.
Fischer's problem is the rate and scale of the appreciation. He is facing off against financial institutions, companies, and what are called "speculators", who exploit the interest rate gap between Israel and other countries to try to force the pace of appreciation. This is Fischer's battlefield, where speculators gambling on a fast and sharp appreciation are ranged against the governor, who wants to slow the pace by buying foreign currency.
Until this week, Fischer was able to restrain the shekel's appreciation by buying billions of dollars. These purchases caused no little angst among financial institutions that had bet on especially low shekel-dollar exchange rates. Yesterday, too, Fischer was able to prevent an even greater shekel appreciation.
The test now is to see who will break first. If futures contracts expire on a date when the shekel-dollar exchange rate is higher than the rate the speculators bet on, Fischer wins, and quite a few people at foreign banks will have to dream up explanations for the heavy losses accrued. However, if Fischer fails, the price will be paid by many employees in Israeli industry.
Published by Globes [online], Israel business news - www.globes-online.com - on January 14, 2010
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