Shekel hits 2009 high against dollar

Exchange rate breaks the NIS 3.8 barrier as Bank of Israel signals new monetary direction.

bank of israel 248.88 (photo credit: Ariel Jerozolimski)
bank of israel 248.88
(photo credit: Ariel Jerozolimski)
The shekel-dollar exchange rate slid to its lowest level this year on Tuesday, on rising expectations the Bank of Israel will halt its dollar-purchase program and will be among the first banks to hike interest rates. "The exchange rate fell below a low of NIS 3.85 on Monday, continuing its downward spiral in the same direction almost without stopping," Tal Uvda, vice president of investments at Clal Forex, said Tuesday. "The steep fall of the US currency points to an accelerated lack of confidence of investors in the US economy and in its ability to recover swiftly from the crisis. "The future of the dollar trade opposite the shekel will depend on developments around the globe and changes in the policy of the Bank of Israel's dollar-purchase program. The central bank has already announced that it was considering an exit strategy to the program." The shekel-dollar exchange rate broke the NIS 3.80 barrier Tuesday morning, declining 0.8 percent over the course of the day and closing at a representative rate of NIS. 3.78. Uvda said the loss of confidence in the dollar could send it to a level of NIS 3.75 in the short term and down to NIS 3.6 in the long term. On Monday, the Bank of Israel left interest rates at a record low of 0.5% for the fifth consecutive month and announced it would terminate its bond-purchases program starting August 5. The central bank also confirmed it would continue the daily foreign-currency purchases, which started in March 2008 to weaken the shekel against the dollar and help exporters. "The Bank of Israel hinted at a very gradual approach to unwinding the strong monetary stimulus given since September 2008, saving the rate hikes for only after they unwind the additional means of monetary easing (e.g. foreign-exchange and bond purchases), while buying time to test the bank's 'temporary rise in inflation' expectations," Turker Hamzaoglu, an economist at Merrill Lynch Investment House, said in a report Tuesday. "Ending the purchase program will tame money-supply growth to some extent and be marginally supportive of the shekel, in our view," he said. "We maintain our view that the Bank of Israel will be among the first central banks to hike rates in this cycle, but that the first hike is unlikely to come before late 2009 at the earliest, despite increasing CPI inflation. We've pencilled in a 50 basis-point hike in December 2009." Interest rates will be raised to 1% by the end of 2009 and to 2.5% in 2010, according to the Merrill Lynch forecast. "Bank of Israel Governor Stanley Fischer still maintains his bias toward supporting economic activity over fighting inflation, as he sees the recent rise in inflation as largely temporary due to one-off price adjustments," Hamzaoglu said. The central bank's decision to cancel the bond purchases was a way of softly introducing a new orientation to monetary policy, David Lubin, an economist at Citigroup, said in a report Tuesday. "The chances are high that the foreign-exchange purchases will continue for some time, to avoid an unwelcome appreciation of the exchange rate," he said. "For that reason, it seems likely that the next major policy move will be a modest hike in interest rates, which we expect to occur in the fourth quarter. Either way, the stage seems set for a stronger shekel." Worldwide, the dollar traded near the lowest level in seven weeks against the major currencies on speculation the global economy is shaking off the worst recession since the 1930s, according to analysts at Finotec. "The US currency touched a seven-week low versus the euro, trading at 1.42, as a report showed on Monday sales of new homes rose last month the most in eight years and risk appetite resurged in global markets," Finotec's Benny Menashe and Erez Frisch said in a report Tuesday.