Fischer steps in to save the dollar

Central Bank to buy $100 million daily to stop shekel's appreciation.

Stanley Fischer Good 88 248 (photo credit: Ariel Jerozolimski)
Stanley Fischer Good 88 248
(photo credit: Ariel Jerozolimski)
The Bank of Israel announced Thursday that it was raising its daily purchases of foreign currency from $25 million to $100m. to stem the rapid appreciation of shekel against the dollar. "The decision to increase the pace of purchases was taken after examining the program in light of current market conditions, and the cumulative and rapid change in the exchange rate of the shekel," the central bank said in a statement. "The Bank of Israel will continue to review the program from time to time to take into account changing market conditions." Prior to the announcement, the shekel continued to appreciate against the dollar in inter-bank trading. By midday, the shekel-dollar exchange rate rose to a 12-year high of NIS 3.20. Just minutes after the announcement, the shekel dropped to NIS 3.33 against the dollar, closing at a representative rate of NIS 3.31. On Wednesday, the shekel-dollar representative exchange rate was set at NIS 3.23, down 1.1 percent from Tuesday. "The timing was not expected, but the writing was on the wall," Rafi Gozlan, deputy head of investments at Prisma Investment House, told The Jerusalem Post. "The move by the central bank to increase the daily purchases of foreign currency sends out another signal to the market that the bank will continue to intervene in an effort to halt the appreciation of the shekel. The daily amount of $25m. was not enough and it remains to be seen whether daily purchases of $100m. will be sufficient. But what can be said is that the move will slow down the pace of the appreciation of the shekel." Bank of Israel Governor Stanley Fischer in March announced plans to increase the bank's foreign currency reserves to between $35 billion and $40b. from $28b. over the next two years by buying $25m. of foreign currencies daily. Growing expectations that the Bank of Israel would have to raise the interest rate at the end of the month in response to surging inflation pressures had prodded Israeli investors to sell dollars over recent days, Finotec Investment House said Thursday in its daily exchange-rate report. The Israel Export Institute and the Manufacturers Association of Israel on Thursday harshly criticized Fischer and the Finance Ministry for not having intervened to stem the appreciation of the shekel, which is weighing heavily on industry profits and competitiveness. "Exporters don't want to return to the times of massive intervention by the government and the Bank of Israel, but there are times when there is no other choice," Israel Export Institute chairman David Artzi said at the organization's annual meeting in Tel Aviv on Thursday. From July 2007 until end of last month, he said, the dollar had plunged 19.6%. "We are in a crisis and this situation has become a national interest," Artzi said. "We are not going to sit still. We are urging the governor to establish an investigation committee." Meanwhile, the UBS investment bank warned on Thursday that if the shekel started to weaken, the local economy would be "negatively" exposed to the full force of inflationary pressures. "Thus shekel strength, which is plus 16% year-to-date, has mitigated the rise in the consumer price index. However, a weakening shekel will probably increase the inflationary pressures in Israel," UBS analyst Darren Shaw said in a research note to investors. He cited the high correlation between the CPI and movements in the shekel-dollar exchange rate, noting that if the shekel were to fall 4% against the dollar, the CPI would increase by 1%. Shaw said he was concerned that high inflation would effect the profitability of many Israeli companies. "Israel's economy is unique, as around 50% of total debt is CPI-linked," he said. "We believe the recent spike in the CPI in Q2 (2.5% in Q2 = 10% annualized) surprised most market participants, and we are concerned that further upside surprises to inflation could be negative for the Israeli economy." Shaw said the Israeli consumer could be hit by a rise in food and energy prices, together with a rise in mortgage payments, which are CPI-linked, and higher rental costs. "This could significantly curb [the] consumer spending that has driven GDP growth over the past few years," he said. "We believe the rise in CPI will also have fiscal implications, as the government could be squeezed by paying more on its CPI-linked debts, as well as collecting less corporate taxes."