Like veteran boxers who have fought many bouts with each other, this week, once again, Governor of the Bank of Israel Stanley Fischer and the speculators who have gambled on a strengthening shekel stepped into the foreign currency ring. Previous bouts ended with victories on points for Fischer, who moderated the appreciation of the local currency and caused his opponents to sweat; a small exposure of theirs was liable to end in a huge loss if the shekel did not rise enough.
The current bout is not substantially different from previous ones. As foreign banks and local players inject dollars into the market, the Bank of Israel buys foreign currency. According to various calculations, this has been to the tune of $600 million in the past few days alone. For the time being, the shekel has not broken through the 3.7/$ barrier, but we are only at the beginning of the current contest, and there may be further purchases. The message is simple: although Fischer talks about conditions for exiting the market, for the time being he is there, preventing any sharp appreciation and buying dollars. He has stated both in public and in private that as long as the Israeli economy grows faster than other industrialized economies and is stronger than them, appreciation of the shekel is inevitable. The question is by how much, how fast, and to what level.
Today, at the hoteliers conference, he again stated that the central bank's obligations include protecting employment and exports in Israel, which turns the intervention policy into an acceptable policy tool, if he feels that there is a speculative attack. His problem is that he is alone in the arena. Israeli institutions are buying foreign securities and investing overseas, but they do that while hedging currency risk, which offset the effect of their operations in the capital market.
The other side can't be happy either. In recent weeks, Fischer has managed to keep the shekel at levels close to 3.8/$, taking advantage of the following wind from the global strengthening of the US dollar. At present, no-one knows when those who are exposed will start to suffer substantial losses on open contracts. If it happens on a large scale and there is a need to close positions quickly, the result is likely to be a further weakening of the shekel. However, the latest data still indicate a US economy suffering from weakness, like many economies in Europe. In these conditions, the shekel should strengthen, and any attempt to prevent that is doomed to failure.
In the coming days, the status quo between the two sides will probably be maintained: the Bank of Israel will continue to buy foreign currency, if necessary, and the private sector, domestic and foreign, will continue to sell dollars. This situation could carry on for quite a while, unless the dollar again starts to strengthen globally, or, alternatively, the value of the US currency collapses. As long as we don't reach such extreme positions, Fischer and the speculators will continue to face off.
Published by Globes [online], Israel business news - www.globes-online.com - on January 7, 2010
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