Bank of Israel jiggers formula for exchange-rate basket

Instead of 28 currencies from 38 countries, the new index includes 26 currencies from 33 countries.

By NIV ELIS
Tel Aviv stock exchange (photo credit: REUTERS)
Tel Aviv stock exchange
(photo credit: REUTERS)
For the first time in six year, the Bank of Israel on Wednesday updated the formula it uses to calculate its nominal effective exchange rate, giving more weight to China but eliminating nine countries from the formula.
The effective exchange rate is a number the central bank uses to measure how week or strong the shekel is against a basket of currencies. Instead of just looking at, for example, the exchange rate of the shekel to the dollar to evaluate the effects on trade with the US, or the shekel to the euro to evaluate the terms of trade with European trade partners, the nominal effective exchange rate reflects how Israel’s currency fairs against those of all its trade partners.
The composition of that basket and the weight given to each currency in the basket is meant to reflect how important a particular country is for Israeli trade, though other factors are taken into account as well.
Wednesday’s update, which reflects Israel’s changing global trade relationships over the past six years, indicated a concentration of Israeli trade partners.
Instead of 28 currencies from 38 countries, the new index included 26 currencies from 33 countries.
Austria, Argentina, Denmark, South Africa, Greece, Philippines, Finland, Colombia and Romania were removed from the basket after falling below 0.5 percent of Israel’s trade, while the Czech Republic, Vietnam, Malaysia and Costa Rica were added for the first time.
The new index indicated a decreasing role for Europe and a boost for the US and China. Whereas the euro used to account for 32.6% of the index and the dollar 24.8%, both were set at 26.4%. China’s yuan rose from 5.7% of the rate to 10.2%.