Large-scale conversion of dollars to shekels by companies and businessmen for tax purposes strengthened the shekel against the dollar today.
The shekel-dollar exchange rate fell NIS 0.017/$ to NIS 4.635/$, a 0.37% appreciation, completing a 0.7% depreciation since Friday. The exchange rate has returned to its low rate of four months ago.
In bank trading rooms, it was noted that today’s shekel appreciation had surprised the economists. The shekel was expected to fall against the dollar, not rise, following the unexpected 0.8% drop in the Consumer Price Index (CPI) in November and expectations that the Bank of Israel will lower the interest rate.
The shekel’s strength indicates that foreign currency market traders believe that the interest rate will be cut by only 0.2-0.3%, leaving a large gap between the shekel interest rate in Israel and the dollar interest rate in the US, which will support the shekel.
A number of Israeli banks led the foreign currency trading today. The foreign banks were not active today. The purchase of dollars by importers and the business sector prevented a larger shekel appreciation.
The shekel traded in a wide NIS 0.03/$ band today. The highest rate, NIS 4.666/$, was posted at the beginning of trading, while the lowest, NIS 4.63/$, occurred an hour before the close of trading. The shekel has appreciated by NIS 0.23/$, amounting to 4.7%, since October, and NIS 0.27/$, amounting to 5.5%, since September.
Jerusalem economic sources expect the CPI to drop 0.5% in December and 0.3% in January, assuming the shekel-dollar exchange stabilizes at a low level. Cumulative minus 1.5% inflation is expected for November-January, amounting to a 6% deflation in annual terms.
The money supply fell 0.8% to NIS 29.9 billion in November, completing a cumulative 4.1% slide in two months. The downward trend in the money supply has continued for six months, reflecting the economic downturn. The money supply has plunged by 8% since June, amounting to a drop of NIS 2.7 billion.
Economic sources in Jerusalem believe that Government of the Bank of Israel David Klein will lower the interest rate by 0.3% on Monday, the first cut since December 2001. The interest rate has been raised by a cumulative 5.3% in the past six months.
The Bank of Israel said that inflation expectations for the coming 12 months had fallen to 3.6% in November, compared with 4% in October. Capital market inflation expectations for the coming 12 months continued downwards in December, hitting 2.5-3%, in the upper range of the government’s 1-3% 2003 inflation target.
Published by Globes [online] - www.globes.co.il - on December 16, 2002