Bank of Israel exploits light trading to buy dollars

Karnit Flug
Karnit Flug

Criticism is growing on the foreign exchange market that the Bank of Israel's interventions are losing effectiveness, and may even be damaging.

Yesterday evening the Bank of Israel exploited thin trading on the foreign exchange market and bought US dollars. Following the Bank of Israel's move the shekel-dollar and shekel-euro exchange rates rose. The shekel-dollar rate is currently 0.14% above yesterday's representative rate, at NIS 3.6329/$, and the shekel-euro rate is up 0.17%, at NIS 3.8734/€.

The Bank of Israel's interventions in the foreign exchange market are beginning to lose their effect, with critics of its policy saying that they play into the hands of currency speculators. The Bank of Israel buys dollars in large quantities, and market players who spot its heavy hand sell it what it wants at high prices. Immediately after the dollar purchases, the exchange rate reverts to its former level, necessitating further intervention.

The Bank of Israel argues that it is trying to moderate the volatility on the market in order to reduce the desire of speculators to play the currency and thus support exporters, but some economists and market sources see this as a faulty perspective. "If the Bank of Israel wants to support exports, it should behave like the prime minister's economic adviser and the minister of finance and support them through less damaging means such as subsidies, tax benefits and so on. The Bank of Israel is behaving like a bull in a china shop. All it is doing is to raise the cost of living in Israel and to cost the taxpayer a great deal of money," a business source told "Globes" yesterday.

Leumi Capital Markets says that the geo-political uncertainty is making investors seek shelter, and the shekel is perceived as a strong currency. "The longer the political uncertainty continues, the more the shelter currencies will strengthen, and that is the Bank of Israel's challenge," Lior Faust, head of the foreign currency desk at Leumi Capital Markets, told "Globes" yesterday.

Dollars flow into Israel mainly because of Israel's trade surpluses, and that being the case it is not clear what ammunition remains to the Bank of Israel. Immediately after a dollar purchase more dollars flow in and the rate goes back to where it was. It seems that the main problem on the foreign exchange market at present is the lack of coordination between the Bank of Israel and the Ministry of Finance, which is causing the central bank to play its own game instead of contributing to solving the problems of exporters and the labor market and slowing its foreign currency purchases so that they will become more effective in the future.

Published by Globes [online], Israel business news - - on April 4, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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