As the world's central banks, including the Bank of Israel, cut interest rates to calm tumbling stock markets and try to preempt a recession, the greenback is gaining momentum. On Thursday, the shekel weakened substantially against the dollar and the euro. The shekel-dollar representative exchange rate rose just over 2 percent and was set at 3.70. The shekel-euro representative rate surged 1.2% to 4.99. "This is not a correction. The shekel is catching up with the global trend of high demand for the US currency. Traders are fleeing exotic markets and currencies, a market with which the shekel is correlated, and diverting the money back to the dollar," said Sagiv Peretz, senior analyst at Finotec Investment House, in a telephone interview with The Jerusalem Post. "In a time of a crises and high volatility on global stock markets, the US dollar is considered a relatively save haven despite the US economic situation. A lot of investors are taking their money out of from exotic places and are bringing them back to the US," Peretz said. On Wednesday, Business Data Israel warned in a special report on the global economic crisis that the local government's failure to formally insure deposits could lead to an outflow of $23 billion from local bank deposits held by foreign residents. On Thursday, the Tel Aviv Stock Exchange finished another day of volatile trading responding to sharp losses on global stock markets late on Wednesday. The Tel Aviv-25 Index dropped 2.85%, closing at 751.04 points, and the TA-100 fell 3.11%, to 674.13. The Tel-Tech 15 Index of top technology issues declined 1.85%, to 153.95 points, and the Real Estate 15 Index sagged 5.85% to 238.08 points. On Wednesday, the TA-25 Index closed up 0.7%, after the market had been closed for a two-day holiday, while the TA-100 gained 1.8%. Peretz said the combination of falling interest rates, growing indications of a slowdown in the local economy and the robustness of the dollar on world markets, were all factors weakening the shekel. "Signs of a recession in the US and the much faster than expected breakout of the crisis to Europe have put pressure on global central banks to take drastic monetary policy steps to fight a recession rather than focus on bringing inflation down," he said. "This trend will further strengthen the US dollar in global markets." The consumer price index for September, reported late on Wednesday, was surprisingly unchanged, against the analyst consensus of a 0.4% rise, leaving the Bank of Israel room to cut interest rates further. "The September CPI report will no doubt encourage the Bank of Israel, which last week cut rates by 0.5% almost three weeks before the [next] scheduled meeting. It should also give cause for the market to expect further rate cuts from the current [benchmark] 3.75%, which in turn will weaken the shekel against the dollar," Peretz said. "As a result we could see the shekel-dollar exchange rate move to 3.80 in the medium-term."
