The central bank cannot beat the market and will notcontinue to buy foreign currency forever, Bank of Israel GovernorStanley Fischer said Wednesday."Exports are fundamental to the development of thelocal economy," he said at a session of the Knesset Finance Committee."But we all know that in the long term, central banks are not able tobeat the market. During the recession we had an impact on the exchangerate, and as result our recession was shorter than the global one."
Fischer said exporters needed to adapt to areality in which the central bank cannot prevent market forces fromaffecting the foreign-exchange rate.
On Monday, the Bank of Israel announced that it would "act inthe foreign-exchange market in the event of unusual movements in theexchange rate that are inconsistent with underlying economicconditions, or when conditions in the foreign-exchange market aredisorderly." After the announcement, increased dollar purchases boostedthe dollar-shekel exchange rate by more than 5% to a representativerate of NIS 3.88 on Wednesday.
Since the central bank started to buy foreigncurrency in March 2008 to help stem the dollar slide, foreign-currencyreserves have been pumped up to $52 billion at the end of July, up from$32b. in July last year.
"There is a cost to holding reserves, but there is also anadvantage and a gain," Fischer said. "A country with large reserves ismore secure to weather economic shake-ups around the world. In thiscrisis, countries with larger reserves like Brazil and Korea managed tocope with their problems better than countries with lower reserves."
According to Daniel Tenengauzer, an analyst atBank of America-Merrill Lynch, instead of weakening the greenbackagainst the shekel, the central bank's dollar-purchase program hassupported the shekel.
"Ironically, the dollar-purchasing program initiated by thecentral bank has contributed to strengthening the country's macrofundamentals, through an improvement of the foreign-currency reservesposition," he said in a report Wednesday. "We are now bullish on theshekel, as we think that Israel is well-positioned to exit the crisison a strong footing."
Tenengauzer said despite a sharp drop in export performance,the economy has proved relatively resilient, and there were signs thatthe macro outlook has improved. He forecast the dollar-shekel exchangerate to weaken to 3.55 by year-end and continue depreciating in thefirst half of next year.
"As an illustration of that, the Bank of Israel recentlyannounced that it would stop buying government bonds," Tenengauzerwrote. "The next step should be an interruption of theforeign-exchange-reserves accumulation program, which will ultimatelyprovide some support to the shekel.
"Our key risk to our bullish call is the adverse fiscaldynamics that may weigh on investor sentiment and credit ratings downthe road."