Bank of Israel halts daily dollar-purchase program

Foreign-currency policy to depend on economy's needs, central bank says.

By SHARON WROBEL
August 11, 2009 10:10
2 minute read.
Stanley Fischer good

Stn Fischer good 88 248. (photo credit: Ariel Jerozolimski)

The Bank of Israel on Tuesday will stop its program of buying $100 million on a daily basis but reserve the right to intervene in the foreign-currency market, the bank announced Monday. "As already announced [last Monday], the Bank of Israel will act in the foreign-exchange market in the event of unusual movements in the exchange rate that are inconsistent with underlying economic conditions, or when conditions in the foreign-exchange market are disorderly," the central bank said in a statement. "The new operating policy of the Bank of Israel in the foreign-exchange market will provide a better response to the economy's needs." The central bank said it would discontinue its program of daily purchases, which began in July 2008, because the targeted level of foreign-currency reserves had been achieved. Foreign-currency reserves stood at $52 billion at the end of July; the target set by the central bank in November was between $40b. to $44b. Following the announcement, the dollar dropped 1 percent to NIS 3.87. The Bank of Israel said it could now buy or sell foreign currency in response to exchange-rate movements. "The governor of the Bank of Israel's announcement is maybe the most expected surprise seen in the capital market in a long time," Tal Avda, deputy head of investments at Clal Forex, said Monday. "History has shown that the only significant factor influencing the shekel-dollar exchange rate in the long term is the value of the greenback in the global-currency market, and [Bank of Israel] Governor Stanley Fischer knows that." Last week, Fischer said the central bank could not beat the market in the long term and would not continue to buy foreign currency indefinitely. In determining its new intervention policy in the foreign-exchange markets, the bank said it would consider a number of factors, including: the level of economic activity, in general, and the export situation, in particular; the level of inflation; financial stability; and the functioning of foreign-exchange markets. "We believe that the governor will continue the central bank's policy of maintaining an exchange rate that is in line with macroeconomic parameters and the needs of the economy," Israel Export Institute director David Artzi said Monday. "The announced change is a systematic change from buying set amounts of foreign currency to purchases according to the situation and needs of the economy." The new policy was the right way to cope with the amount of speculators active outside the country making big gains in a short period of time, while helping to strengthen the shekel, which is causing great losses for exporters, since intervention will now be more uncertain, he said.


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