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BoI fails to flatten curve as shekel gains continue

  • January 14, 2021

The shekel is strengthening today against the dollar and against the euro. In late morning inter-bank trading, the shekel-dollar exchange rate was down 0.60% against the dollar at NIS 3.115/$ and the shekel-euro rate was down 0.64% at NIS 3.788/€.

Yesterday, the Bank of Israel set the representative shekel-dollar rate 0.791% lower from Tuesday, at NIS 3.134/$, and the representative shekel-euro rate was set 0.716% lower, at NIS 3.813/€.

The Bank of Israel, which has been buying large amounts of foreign currency to moderate the strengthening of the shekel, is beginning to look like the Dutchman with his finger in the leaking dike. Despite purchases of $20 billion in foreign currency last year and record foreign exchange reserves of $173 billion, the shekel is still at its strongest against the dollar since 1996.

In 2019 and 2020 the shekel has been the strongest performing currency against the dollar and euro, strengthening 15% against the dollar over the two years. In the first two weeks of 2021, the shekel has already strengthened by another 2.5% against the dollar.

It is true that the past year has been extreme with various factors driving shekel gains: high-tech exports, direct investment in Israel, the current account surplus, and Israel joining the World Government Bond Index (WGBI), as well as the closure of borders because of Civid-19 and Israelis not going abroad on vacations. Some of these factors won’t be felt in 2021 and hopefully millions of vaccinated Israelis will again travel abroad to spend dollars in New York, London and Dubai.

How would things look if the Bank of Israel halted its massive purchases of foreign currency? Presumably the shekel would have strengthened far more sharply. Like the Ministry of Health with the Covid-19 pandemic, the Bank of Israel is hoping to flatten the curve of the shekel appreciation and buy time for exporters.

But the policy raises questions and has a price. For example, while the shekel continues to strengthen the Bank of Israel’s foreign currency portfolio is losing money ‘on paper.’

Another tough question is whether it is right that the Bank of Israel should subsidize Israeli exporters with such large amounts. As Israeli exports have been continuing to grow in a commendable way throughout the pandemic, perhaps the time has come for the Bank of Israel to let exporters fend for themselves.

Published by Globes, Israel business news – en.globes.co.il – on January 14, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021


Article source: https://en.globes.co.il/en/article-1001357137#utm_source=RSS

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