At the end of the G8 meeting in Japan, German chancellor Angela Merkel and French president Nicolas Sarkozy expressed regret that the summit failed to produce any declaration about what was happening on world foreign exchange markets. The two leaders said they were fearful of the consequences of the weakening dollar, which will further weaken European industries.
In a nearby part of the world, the Bank of Korea intervened in the foreign exchange market strongly today, in order to try to bolster the local currency. The amount of the intervention, some $5 billion, was enough to cause a 2.5% turnaround in the direction of recent trading in the won.
These examples should bring home to Governor of the Bank of Israel Stanley Fischer that he is not alone in the battle. It's hard to see very much comfort in that, especially on a day when the shekel strengthens by a further 1% against the major currencies. From a low of NIS 3.23/$, the situation doesn't exactly look rosy. And what's permissible for the Bank of Korea is also permissible for the Bank of Israel.
In the end, the Bank of Israel will intervene in the foreign exchange market, after a process of mental adaptation. It may happen sooner than expected, but it may also be that the central bank will prefer to abide by its belief that any intervention will do more harm than good, as happened a few months ago. However, sometimes reality leaves no choice, and even the Bank of Israel will be forced to act.
Up to now, the Bank of Israel has expected the trend to turn round by itself. But reality can be cruel. The shekel strengthens when the euro strengthens. When the euro doesn't strengthen, the shekel rises because Israeli businesses liquidate overseas portfolios. When Israeli businesses take a breather, foreign hedge funds invest in shekel assets. And when the hedge funds aren't looking at Israel, the shekel strengthens because its belongs to the emerging markets, and that's where the money goes that day.
In other words, apart from the Bank of Israel, there is no-one around at present who will bring about a change in the trend. All that is left t do now is to wait for Fischer's decision. The hope and there is no certainty about this is that in the bank's wake will come the institutions, the hedge funds, corporations, and the public at large. Without intervention, it's doubtful whether anything will happen soon.
Published by Globes [online], Israel business news - www.globes.co.il - on July 9, 2008
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