Dollar hits new 30-month low against shekel

Analysts expect continued decline if Bank of Israel continues to raise interest rates.

April 4, 2011 23:17
3 minute read.
The Jerusalem Post

Money 311. (photo credit: Bloomberg)


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The dollar hit a new two-and- a-half year low in early currency trading on Monday, as analysts predicted that it could fall to as low as NIS 3.35 if the Bank of Israel continues to raise interest rates.

By late Monday afternoon the dollar was trading at NIS 3.466, after falling to NIS 3.450 earlier in the day, its lowest mark since September 30, 2008.

After purchasing more than $200 million on Sunday, the Bank of Israel bought another $100m. on Monday morning as it attempted to counter the dollar’s fall. However, foreign- exchange dealing rooms reported aggressive sales by foreign banks and hedge funds, a continuation of the massive selling of dollars in recent weeks.

Last Monday the central bank announced that it had increased the interest rate for April by 0.5 basis points to 3.0 percent as it focused on fighting high inflation, defying the consensus among economists that it would only raise the rate by a quarter-point. Inflation rose by an annualized 4.2% in February, its fastest pace in more than two years.

The dollar could fall to as low as NIS 3.35 sooner than everyone expects, if Bank of Israel Governor Stanley Fischer surprises everybody and raises the interest rate by another 0.5% in May, Meitav Investment House chief economist Ron Eichal told The Jerusalem Post Monday.

The April rate rise had “decreased immediate pressure for [more] rate rises,” he wrote in a report. The continued growth in housing prices would be a decisive factor in Fischer’s next decision, he wrote, and “one could not rule out another [interestrate] rise in the event that there will be negative inflationary developments.”

Israeli financial-markets trading firm USG Capital predicted that the exchange rate would approach NIS 3.40 over the next three months in light of the growing gap between the shekel and dollar interest rates.

“We expect that foreign capital will continue to pour into Israel, despite the Bank of Israel’s sanctions against foreign investors,” USG Capital analysts Shay Zakhaim and Eli Ben-David wrote in a report. “We will see the shekel strengthen against all the currencies in the basket.”

They said the interest rate could rise by another 0.25% in May, and there will be further rate rises every month if inflation continues to climb.

Meanwhile, Manufacturers Association of Israel president Shraga Brosh wrote a letter to Prime Minister Binyamin Netanyahu on Monday, in which he urged him to take fiscal measures to weaken the shekel.

“Dealing with this dangerous situation is the responsibility of the prime minister,” he wrote, adding that manufacturers had lost some $11 billion in deals since 2006, due to the 25% appreciation of the shekel against the dollar in the same period.

“We ask for a special meeting of the social-economic cabinet to be convened to discuss the dangers and the implications of the strengthening of the currency and to decide on a series of immediate measures to strengthen the competitiveness of the Israeli economy,” Brosh wrote.

“The determined effort by the governor of the Bank of Israel against this trend succeeded in curbing the damage and helping the business sector,” he added. “However, due to the rise in inflation expectations, the governor has been forced to focus on the fight against inflation, which has greatly limited his ability to help in weakening the shekel.”

Globes contributed to this report.

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