A stable currency

Confidence would grow once perception grew that responsible hands are at nation's fiscal helm.

stanley fisher meeting 8 (photo credit: Ariel Jerozolimski/The Jerusalem Post)
stanley fisher meeting 8
(photo credit: Ariel Jerozolimski/The Jerusalem Post)
Bank of Israel Governor Stanley Fischer took the entire country - from ordinary citizens to Treasury higher-ups - by surprise last Thursday and Friday when he engineered intervention to somewhat slow down the shekel's frenzied overvaluation. It was the first time in 11 years that the bank had bought dollars to impact currency dealings. This went against the grain of Fisher's own avowed hands-off approach, reiterated in recent weeks even as the shekel's steady rise had continued unabated. Fischer was not showered with accolades. Some "Treasury sources" were especially caustic, forecasting that such meddling will be ill-received abroad as contrary to free-market practices. Moreover, they complained variously that it would not help, that it was a case of too little too late, that market forces are best left to their own devices, that synthetic rates won't hold and that Fischer should have consulted the finance minister. Some of the above carps may not be entirely without merit, although the governor's responsibilities clearly empower him to act precisely as he did, independent of the ministry. Non-interference is always preferable - but only on condition that it works. The wildly appreciating shekel may be a source of national pride, but, if unchecked, could spawn a recession. The closure of Polgat may be but a harbinger. Exporters cannot be forced to stay in business at a loss and their struggles mean unemployment and an attendant vicious cycle of slowdowns and slacking demand. Putting such concerns aside for the sake of the temporary feel-good factor or an insistent commitment to policies that are being undermined by changing circumstance is similar to the prevalent temptation to ignore Hizbullah's and Hamas's massive reinforcement. Problems cannot be wished away. The shekel, steadily gaining in value, appears like one of the world's hardiest currencies. Even 2006's Second Lebanon War failed to set it back. It seems invincible. But is this a blessing? Exchange rates, like appearances, can be misleading. Though the shekel may look impressive, it is not backed by a mighty, sizable or even solidly secure economy. True, Israel's recovery from the deep slump of this decade's outset was no less than remarkable, and its hi-tech sector is booming. Nevertheless, this does not quite account for the shekel's phenomenal rise. It is not merely a function of America's economic woes either, as last week the shekel dramatically rose against the powerful euro, too. The fluctuations in overseas money bourses, therefore, do not provide the full explanation. Plainly, the local currency is a temporary beneficiary of hedge fund speculation, as well as of panicked reactions by local firms who, fearing losses, are ditching the freefalling US currency. The upshot is that the market is flooded with dollars for sale, dragging its price down and bolstering the shekel's value. Fischer knows that this can very quickly become too much of a good thing. Considering the rise in the shekel's worth to be exaggerated, he had no choice but to rush to the rescue and remove a quantity of excess dollars from the sales-counters while making more shekels available. The market was behaving irrationally - be it due to speculative profiteering or stampeding herd mentality. Fischer moved to correct the imbalance in supply and demand. Does this signal a long-term redirection of Israel Bank policies or was it a limited offer of urgent first-aid? If the latter is the case, then odds are that it will turn out to have been as ineffectual as Fisher's belated interest-rate reductions proved when the rush on the dollar was already too intense to be reversed by a minor gesture. But if Fischer signals to all the currency players here that similar actions may be taken as deemed necessary, then the market's fever can be lowered. Confidence would grow locally once the perception grew that stabilizing and responsible hands are at the nation's fiscal helm. There is, of course, no guarantee at this point that sanity can be easily restored to our financial scene, but without even the expectation of some sensible supervision, things could only get more chaotic. Central bank control is almost a dirty term in today's globalized marketplace, but runaway laissez-faire economics can pose threats to small and potentially turbulent economies like ours - vulnerable despite the shekel's bravura.