currency dollar yen 88.
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The Bank of Israel said this week it increased the weight of the dollar and yen and reduced the relative importance of the euro and pound sterling in the composition of the currency basket, to keep the basket in line with the proportion of currencies used by Israel in foreign trade over the past year.
Effective May 1, the dollar's weight was increased to 65.65 percent of the basket from 63.64% and the yen was promoted to 5.73% from 5.41%, while the euro fell to 22.94% from 24.9% and the pound sterling was reduced to 5.68% from 6.05%.
The proportions are updated at the end of April each year, the central bank said, stressing that the change has no influence on the various exchange rates and of the shekel against foreign currencies.
"The dollar continues, by and large, to be Israel's most important currency in international business," said independent economic researcher Dr. Zalman Shiffer, formerly of the Bank of Israel. This could indicate that while the euro has been gaining influence internationally in recent years, the trend - in Israel at least - is not as strong as some may think, Shiffer indicated.
Currency basket proportions were used as a tool until the maintenance of a binding exchange rate fluctuation band was cancelled in June 2005. No longer used to calculate the band's margins, the currency basket is now used for comparisons with the shekel's representative exchange rate "for indicative purposes alone," the central bank noted.
Earlier, the central bank said its foreign currency reserve totalled about $27.8 billion in April, having been reduced by $72 million from the previous month.
Though given in dollars, the foreign currency reserve's actual composition is not public knowledge. Bank of Israel deputy spokeswoman Rimona Leibowitz said that the reserve is held in dollars, euros and pound sterling, with none held in yen.
Shiffer estimated that the Bank of Israel may have followed the international trend of increasing euro reserves and reducing dollar reserves, as reported by the International Monetary Fund. "But there is no way of knowing," and in any event the central bank bases its decisions on sophisticated models, he said.
Leibowitz said that the central bank manages the composition of the foreign currency reserves in accordance with long term policy goals, including repayment of debt. Any repositioning based on expectations of future values of a particular currency is "very marginal and insignificant," she said.
The composition of the central bank's reserves is not influenced by fluctuations in the various currencies.
"If I have a debt in dollars, it doesn't matter to me so much if it rises or falls," she said.
Israel has an interest in reducing the level of dollarization in the economy, particularly as a currency of account in business conducted between Israelis, Shiffer said, noting that research has shown that putting a contract (such as a real estate transaction) in dollars is actually riskier than not indexing the contract at all. The government should discourage the practice and, itself, serve as an example by doing business with Israelis in shekels, he said.
Dr. Nathan Zussman of the Hebrew University agreed.
"You are basically imposing costs on yourself by using the dollar or euro for domestic contracts," he said at a conference on "The political economy of currency unions in a globalizing world," held this week by the Hebrew University's Leonard Davis Institute for International Relations.
At the conference, Yoav Soffer, a researcher at the Bank of Israel and Ben-Gurion University, presented a calculation showing that, hypothetically, joining the euro block would save about $55m. yearly, or 0.09% of Israel's GDP, while joining the dollar would save $118m., or 0.18% of the GDP.
These estimates are low, since they do not take into account additional savings created by the switch of trade to the new currency that would occur, Soffer noted.
Yet Soffer could not say whether Israel should prefer joining the dollar over the euro, since Israel's level of economic divergence from the European Union is to those seen among member countries themselves, and the stronger correlation of the shekel with the dollar - itself largely the product of the high level dollarization in Israeli transactions - would be reduced if the country adopted the euro.