Rising rates may fuel shekel gains

Gains against the dollar may also be “inevitable” because of increases against the euro.

April 6, 2010 04:32
1 minute read.
Rising rates may fuel shekel gains

Shekel. (photo credit: ru.jpost)

The shekel may strengthen as gradual interest rate increases to about 2.75 percent by year-end “build appreciation pressures” on the currency, according to Tevfik Aksoy, a London-based economist for Morgan Stanley.

Gains against the dollar also may be “inevitable” because of recent increases against the euro, he said.

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“The expected tightening in the coming months will build appreciation pressures on the shekel,” Aksoy said. “If the euro-dollar rate were to remain unchanged and the policy rate were to rise as much as I expect, an appreciation in the shekel would be inevitable.”      

The Bank of Israel on March 28 raised its benchmark interest rate for the fourth time since August as inflation expectations increased and the economy expanded. Governor Stanley Fischer increased the rate by a quarter point to 1.5% after economists were split on whether the bank would tighten credit, with six surveyed by Bloomberg predicting the decision and eight expecting no change.

The shekel strengthened 0.4% versus the dollar to 3.96 in Tel Aviv on Thursday, bringing its gains for the three days since the interest rate decision to more than 1%. The currency is up 8.9% versus the euro this year, the top performer among 10 emerging market currencies ranked by Bloomberg in Europe, the Middle East, and Africa. That compares with a 6.2% US dollar gain versus the euro in the same period.

While central bank interventions in the foreign currency market may dampen shekel demand as they “scare off investors,” they aren’t likely to stop shekel gains, Aksoy said.

Fischer has more than doubled reserves since March 2008 in an attempt to weaken the shekel and help exporters. Reserves totaled $60.7 billion at the end of February.


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