Doubters dis BoI's intervention policy to stem dollar's slide

The Bank of Israel announced "that it will act in the foreign-exchange market in the event of unusual movements in the exchange rate."

bank of israel 248.88 (photo credit: Ariel Jerozolimski)
bank of israel 248.88
(photo credit: Ariel Jerozolimski)
The Bank of Israel's increased dollar purchases boosted the dollar-shekel exchange rate by 3.3 percent on Tuesday to NIS 3.86, but the ability of the new intervention policy to stem and control the dollar slide in the long term has been questioned. "The Bank of Israel's new interventionist policy in the foreign-exchange market will strengthen the dollar in the short term, but it is doubtful whether it can buck the global trend," Yaniv Baruch, head of the trading room at etrader, said Tuesday. "The appreciation of the dollar against the shekel on Monday and Tuesday is not evidence of the central bank's ability to ensure a continued appreciation of the exchange rate. "The dollar around the world has come under pressure by ballooning US deficits, a rise in commodity prices - mainly oil and gold prices - and an appreciation of the European currency." Monday afternoon, the Bank of Israel announced "that it will act in the foreign-exchange market in the event of unusual movements in the exchange rate that are inconsistent with underlying economic conditions, or when conditions in the foreign-exchange market are disorderly." In addition, the central bank reaffirmed the continuation of its dollar-purchase program of $100 million per day. Following the announcement on Monday, the dollar-shekel exchange rate rose more than 2%. Reports in the market estimated that the Bank of Israel had bought between $200m. to $300m. on Monday and as much as $400m. on Tuesday. "Without a significant change in the US policy to strengthen the greenback, the US currency will continue to trade at low levels," Baruch said. "In Israel, the action of the central bank will have a one-off impact only and is not likely to have a long-term effect." Analysts at Barclays Capital remained bullish on the shekel despite the central bank's notice of increased intervention in the foreign-exchange market. "The Bank of Israel is concerned about speculative inflows, particularly at a time when the macro outlook and local sentiment (hitherto shekel bearish) is turning more constructive, which could lead to a shekel overshoot," Barclays Capital said in a report published Tuesday. "Our view on further shekel appreciation is not based on a scaling up of speculative positions. Instead, we argue that the local fundamentals are enough to warrant an appreciation. We give credit do the economy for the shekel strength and as a result expect it to resist." Barclays Capital said the speculative positioning seen three weeks ago was still light. According to David Lubin, economist at Citigroup Global Markets, the central bank's new intervention policy was designed to prevent the shekel from being perceived as a "one-way bet." "The bank's problem is that it has been buying some $100 million per day for several months now, a policy that has been effective in helping the real exchange rate appreciate since last year, but has been associated with a very substantial increase in the rate of money-supply growth," he said in a report Tuesday. Lubin said this development has convinced an increasing number of investors that the policy is unsustainable, since the persistent rise in inflationary expectations should, over time, move the bank toward policies designed to tighten, rather than loosen, monetary conditions. "This, in turn, suggests to us that the Bank of Israel needs at some stage to withdraw from the foreign-exchange market, which should lead to an appreciation of the shekel. Hence, the 'one-way bet,'" Lubin said. "The new policy serves the bank's objective to inject more uncertainty, and thereby more volatility, into the exchange rate, which would help cut through the 'one-way bet' argument." However, in the face of increased inflationary pressures and the need for a tighter monetary policy opposite aggressive foreign-exchange intervention, which would constitute a loosening of policy, Lubin said he was skeptical about the ability of the central bank to shake off the "one-way bet" argument.