shekel versus dollar 521.
(photo credit: REUTERS)
The shekel is under pressure again – appreciation pressure, that is.
The recent fall of the shekel to dollar exchange rate to under 3.50 - at one point dipping below 3.40 – has raised several observers’ eyebrows. The shekel to euro rate also dropped, closing in on 5.00. A few years ago, the rate was about 4.80, so it is clear that the exchange rate has eroded significantly and steadily for some time. At one point, exporters expressed concerns that a rate below 4.00 would be significantly harmful for exports.
Although a stronger shekel means less expensive imports for the average Israeli and more affordable holidays abroad, other sectors of the economy are concerned. Israeli institutions whose budget expenditures depend to a significant degree on money coming from abroad, including many non-governmental organizations, some educational institutions and political activist groups, suffer a direct loss of purchasing power every time the shekel appreciates. And exporters dislike the erosion of the international export competitiveness that accompanies a strong shekel because it means that their products automatically become more expensive in foreign markets.
Pressure from industrialists is one reason that the Bank of Israel has
for several years been making great efforts to weaken the shekel as much
as possible, mainly by conducting daily purchases of foreign currency
amounting to billions of dollars per day.
There is only so much, however, that the central bank can do to fight
long-term and international trends that, if they continue, will cause
the shekel to keep getting stronger. As far back as February 2010, the
governor of the Bank of Israel, Stanley Fischer, stated in an address on
a visit to Australia that the bank cannot intervene in the foreign
exchange market forever because the amount of reserves it can sell is
limited. Capital flow regulations pose another option that policy makers
can adopt, but in this regard Fischer stated, “It is [incumbent] upon
policy makers to make every effort to refrain from implementing such
measures” – although he did then add that “for central bankers it is
never worthwhile to say never”.
When the ammunition that the Bank of Israel can keep firing in this
battle starts to run out, Israelis may have no choice but to adjust to
the shekel as a relatively strong international currency.
The trend lines have been clear for a long time. The real effective rate
of the shekel, as measured against a basket of currencies and taking
into account inflation differences between Israel and its trading
partners, has been registering an overall shekel appreciation since at
To some extent, international developments are behind this.
Developing countries in Asia and South America are in the midst of an
unprecedented economic growth spurt relative to the sluggish West. A
trade imbalance has developed over at least the past 15 years between
the United States on one hand and Asian nations on the other, and that
has meant there are long pent-up pressures that analysts foresee can
only be resolved by a depreciation of the dollar.
This in turn means that many corporations and smart investors in the
West are looking for economies around the world in which to put their
money. And one of those economies is Israel.
The more productive the Israeli economy looks relative to most of the
industrialized countries, the more it attracts foreign capital – which
then translates into appreciation pressure on the shekel. The Israeli
economy has humming along very nicely indeed over the past year,
registering overall GDP growth of 4.5% in 2010, with eye-popping 7.8%
annualized growth in the fourth quarter of that year. When Israel
achieves the status of energy exporter, which is expected to happen
mid-decade as off-shore natural gas fields begin yielding their bounty,
there will be little that can be done to keep the shekel from taking off
on a strong appreciation slope.
Since exports account for a 45% of total GDP, there is good cause for
concern about any rapid hit to international competitiveness caused by
changes in currency rates – especially if some industries come to the
conclusion that the only way to maintain global competitiveness is by
eroding local salaries. But a closer look at the situation, as conducted
by a Bank of Israel study in 2008, shows that the effects are not
homogeneous across the economy.
Changes in the real exchange rate, it seems, have no clear impact on exports from industry sectors that are high-tech intensive.
The sectors that are negatively impacted are characterized by low levels of technology, such as textile exporters.
The conclusion from this analysis, then, is no different from the one
arrived at many times in many different ways: the only way to preserve
and increase international competitiveness in the long run is by
investment in training and infrastructure to ensure that the products
sold in export markets have such value added to the end buyers that they
will be attractive no matter what future exchange rate fluctuations