Dollar expected to continue rise

This comes in response to the Bank of Israel cutting its benchmark lending rate half a percentage point to its lowest ever.

us dollar bills 88 (photo credit:)
us dollar bills 88
(photo credit: )
The dollar is poised to continue its positive momentum against the shekel after the Bank of Israel on Monday cut its benchmark lending rate half a percentage point to its lowest ever, while planning to gradually intervene in the foreign currency market. "As the dollar continues to strengthen against the shekel over the past few days, it looks like we are seeing more of a trend of the dollar strengthening around the world rather than a correction," Yaron Chervonips, deputy head of investments at Gaon Investment House, told The Jerusalem Post in a phone interview Monday. "In the local market, the central bank's announcement of a gradual intervention into the foreign currency market has helped to put a halt to the rapid appreciation of the shekel against the dollar since the beginning of the month, bringing confidence in the greenback back to investors and the public." On Monday, the dollar-shekel exchange rate rose 3.6% to NIS 3.52 in day trading, as investors awaited the announcement by Bank of Israel Governor Stanley Fischer of an interest rate cut of between 0.25 percent and 0.5% for April. At the same time, the shekel-euro exchange rate rose by 3.5% to NIS 5.43. The central bank announced a reduction of 0.5% Monday evening, cutting the interest rate for April to 3.25%. The move is expected to support continued economic growth and employment. A reduction in the Bank of Israel interest rate was required this month due to the moderating effect on price rises in Israel of the interest rate differentials between Israel and abroad, via the strengthening of the shekel, the bank said. "If the central bank will cut the April base lending rate by 0.5%, which we forecast, we will see the dollar-shekel exchange rate climb to NIS 3.60 this week, gaining a momentum of NIS 3.70 in the short-term," Chervonips said. "But this forecast is subject to developments of the dollar in the world and volatility on global financial markets, which in turn will have a snowball effect on the local exchange rate. At the same time, the Bank of Israel gave a clear signal that it will remain a player in the market for some time." Economists at Prisma Investment House predicted that the dollar-shekel exchange rate will rise to NIS 3.60 over the coming months in response to the Bank of Israel's plan to intervene in the foreign currency market, which was announced last week. Ahead of the central bank's interest rate announcement, Prisma forecasted a 0.25% cut for the April interest rate, with a similar interest rate cut expected next month. "Looking ahead, we see a change in the direction of the dollar in the world, on expectations of a recovery in the US economy, and therefore we forecast a further strengthening of the dollar-shekel exchange rate to NIS 3.80 in the coming year," said Rafi Gozlan, head of Prisma's Macroeconomics Division. Monday was the first day the central bank began buying dollars on a daily basis, in accordance with the decision made last Thursday to buy $10 billion over the next two years, and $25 million on average per day. The Bank of Israel said it had decided to increase its foreign currency reserves to between $35b. and $40b. It currently has about $28b. in foreign currency reserves. Earlier this month, the central bank intervened in the foreign exchange market for the first time since 1997, buying an undisclosed amount of foreign currency, estimated at around $500m., as the dollar-shekel exchange rate fell to an 11-year low of NIS 3.35. Market reactions to the Bank of Israel's announcement of its plan to buy $25m a day over the next two years were divided. Some analysts said the purchases were marginal compared with the average daily trading volume of $2b., and therefore the effect was mainly psychological. Others disagreed. Economists at Prisma forecasted that the central bank's dollar purchases will substantially boost demand in this key market. "Increasing Israel's foreign currency reserves by $5b. a year amounts to a net 25%-30% of Israeli's foreign investment in 2007, which stood at $17.6b.," Gozlan said. "In other words, this amounts to a net increase of 30% in demand for foreign currency compared with 2007."