Dollar exchange rate falls below NIS 4

Speculation about possible end to BoI foreign-exchange purchase program drives shekel-dollar rate down over 2%.

By SHARON WROBEL
May 21, 2009 22:18
2 minute read.
Dollar exchange rate falls below NIS 4

stack of dollars 248 88. (photo credit: Channel 10 [file])

 
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Speculation about a possible end to the Bank of Israel's foreign-exchange purchase program and the weakness of the greenback worldwide has driven the shekel-dollar exchange rate down more than 2 percent in recent days, flirting with the psychological barrier of NIS 4 per dollar. "In view of reports in recent days, the Bank of Israel wants to reiterate that the bank, in light of the global economic climate, will continue to buy dollars at the rate of $100 million per day on Monday to Thursday and at a rate of NIS 50 million per day on Friday, as part of its program to increase its foreign-currency reserves," the Bank of Israel announced Thursday. "The central bank will continue to review the program from time to time, taking into consideration market conditions and the economic climate in Israel and around the world. If there are changes to the program, they will be announced to the public," the bank said. The dollar continued its downward spiral Thursday, dropping 1.8% against the shekel. It was fixed at a representative rate of NIS 4.01 before breaking the psychological barrier of NIS 4, falling to NIS 3.99 in late interbank trading. Over the last two days, the shekel-dollar exchange rate plunged 2.8%. The central bank reiterated its intention to continue buying dollars after Citigroup Inc. analysts, who met earlier in week in London with Karnit Flug, director of the Bank of Israel's research department, that the program was likely to be stopped gradually, as the exchange rate was "closer to equilibrium than it was in 2008." "We think the central bank could soon find itself in a position where it is neither necessary nor desirable to continue its policy of purchasing foreign exchange at the current rate of $100 million a day," Citigroup economist David Lubin said in a report. "Dr. Flug suggested that there has been discussion about exit strategies within the bank, without formal conclusions." "At one extreme, the risk the bank faces is that an abrupt end to its FX purchases would lead to a sharp appreciation of the shekel," the report said. "At the other extreme, a really sharp rise in inflationary expectations might make the bank welcome a stronger shekel. The key to avoiding these extremes, we think, will be a gradualist approach to ending the FX accumulation strategy, and Dr Flug seemed to endorse this idea." Last July, the central bank increased its intervention into the foreign-exchange market, from buying $25m. in March to $100m. every day after the shekel strengthened to a 12-year high against the dollar, which hurt exporters and slowed industrial production.

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