Rising rates may fuel shekel gains

Gains against the dollar may also be “inevitable” because of increases against the euro.

Shekel (photo credit: ru.jpost)
(photo credit: ru.jpost)
The shekel may strengthen as gradual interest rate increases to about 2.75 percent by year-end “build appreciation pressures” on the currency, according to Tevfik Aksoy, a London-based economist for Morgan Stanley.
Gains against the dollar also may be “inevitable” because of recent increases against the euro, he said.
“The expected tightening in the coming months will build appreciation pressures on the shekel,” Aksoy said. “If the euro-dollar rate were to remain unchanged and the policy rate were to rise as much as I expect, an appreciation in the shekel would be inevitable.”      
The Bank of Israel on March 28 raised its benchmark interest rate for the fourth time since August as inflation expectations increased and the economy expanded. Governor Stanley Fischer increased the rate by a quarter point to 1.5% after economists were split on whether the bank would tighten credit, with six surveyed by Bloomberg predicting the decision and eight expecting no change.

The shekel strengthened 0.4% versus the dollar to 3.96 in Tel Aviv onThursday, bringing its gains for the three days since the interest ratedecision to more than 1%. The currency is up 8.9% versus the euro thisyear, the top performer among 10 emerging market currencies ranked byBloomberg in Europe, the Middle East, and Africa. That compares with a6.2% US dollar gain versus the euro in the same period.
While central bank interventions in the foreign currency market maydampen shekel demand as they “scare off investors,” they aren’t likelyto stop shekel gains, Aksoy said.
Fischer has more than doubled reserves since March 2008 in an attemptto weaken the shekel and help exporters. Reserves totaled $60.7 billionat the end of February.