The Bank of Israel is not the only one that should be concerned at what has been happening on the foreign currency market over the last 24 hours. A strengthening of 2.5% by the shekel within the space of just a few hours cannot be considered a normal occurrence, not for a properly functioning market. The dollar has lost considerable ground worldwide yet within this movement, the shekel's strengthening against both the dollar and the euro stands out above the rest.
There are two "conventional" explanations for the shekel's strengthening and they are not necessarily contradictory. The first is that the strengthening of the local currency has been driven by the expectation of an interest rate hike in Israel at the end of the month. The second lies in the weakening by the dollar against leading currencies and the belief that this is set to continue. Combining these explanations should give us an impetus for the strengthening of the shekel, especially given the move to rapidly close positions which, until yesterday, assumed that the greenback would continue to strengthen.
Does this explanation suffice? According to claims circulating on the market today, the upward pressure on the shekel resulted from large deals originating in New York which were transacted yesterday afternoon, Israel time. It is difficult to see the Bank of Israel settling for these explanations, unless one assumes that one or more parties overseas had to make a very swift closure of an uncomfortable position on the shekel-dollar market.
If that is the case, one would also have to ask where those parties are that have reverse positions, and whether they will have to close them, thereby slowing down the currency's strengthening. This is what would have happened in a sophisticated and properly functioning market with many players. In practice this was not the case, and the Bank of Israel will probably be asking itself why the stabilizing factors that should have prevented a 2.5% movement in the currency exchange rate failed to work.
Published by Globes [online], Israel business news - www.globes-online.com - on June 17, 2008
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