Almost every day the shekel is creating new records in its strength against the dollar and the basket of currencies that make up the nominal effective rate. This is happening even though the Bank of Israel has bought vast amounts of foreign currency in 2020 in its attempts to weaken the shekel. The $17 billion in foreign currency purchased by the Bank of Israel is the largest amount since 2009 when Stanley Fischer was the Governor.
It is ironic that the current Governor Amir Yaron should be buying up foreign currency at a similar rate to Fischer. He was perceived when he first assumed office in December 2018 as somebody who would adopt a more hawkish approach to intervention in foreign currency trading. As recently as last July, Bank of America in an economic survey of Israel observed that Yaron, "is less focused on the strengthening of the shekel that his predecessor Karnit Flug."
Flug came under constant criticism during her term of office, most notably from National Economic Council chairman Avi Simhon, for the alleged unjustifiably high and unnecessary level of Israel's foreign currency purchases, and not letting the shekel strengthen in the direction of NIS 2.50/$.
But those times currently seem so far away. Even though in 2015 Flug decided that $110 billion was the upper limit for Israel's foreign exchange reserves, which was called the "appropriate level for the foreign exchange reserves," as of the end of November 2020, the reserves had reached $166 billion.
Back in 2009, when the reserves were moving towards $30 billion, the Bank of Israel explained that the reserves, among other things, were meant to compensate for their low amount compared with the rest of the world. For about a decade the reserves were kept constant at about 30% of GDP. But this year the reserves have jumped and have now cross the 40% of GDP threshold.
Some of this is not due to the activities of the Bank of Israel but rather the government's raising of capital in foreign currency bonds and the rise in share and bond prices in which the Bank of Israel invests the reserves. But most of the rise is due to the Bank of Israel. Since 2009, the Bank of Israel has purchased about $106 billion in foreign currency on the forex market. But does the bottom line mean that the Bank of Israel has failed because the shekel is still gaining so strongly. Not necessarily.
The pressure driving the appreciation of the shekel is not from speculators but genuine economic factors. These include a huge balance of trade surplus, a current account surplus, record direct foreign investment in Israel. All these factors together with the weakening of the dollar worldwide have created a situation that no central bank could beat over time.
All that the Bank of Israel can be expected to do is smoothen the curve and buy some time so that exporters can adjust themselves to the new exchange rate environment. Has the Bank of Israel succeeded in doing that? Hard to tell but the strength that Israeli exports are showing is definitely a positive indication.
Published by Globes, Israel business news - en.globes.co.il - on December 10, 2020
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