Bank of Israel Announcement Slams Down Shekel

The Bank of Israel put the brakes on the shekel's upward climb against the dollar, and announced it would purchase $100 million a day.

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Hillel Fendel,

Dollar reverses plunge
Dollar reverses plunge
IsraelNN.com

The Bank of Israel put the brakes on the shekel's upward climb, announcing its intention to purchase $100 million a day. The shekel reacted with a sharp plunge against the dollar.

With the dollar dropping on Wednesday to a 12-year-low rate of 3.23 shekels, Bank of  Israel and its chief, Stanley Fischer, announced on Thursday an unprecedented plan to begin purchasing dollars at the rate of 100 million per day.  The bank had been buying a quarter of this amount, 25 million of the greenbacks, each business day for over three months, when the dollar was in the midst of its plunge from 3.85 shekels at the beginning of the year. 
 
"We are increasing our daily purchases," a senior Bank of Israel official said, "and we will test how this will affect the exchange rate."

In fact, the rate jumped immediately after the announcement by about 10 agorot.  The dollar had been trading at 3.21 shekels, and the official representative rate was announced around 3:30 PM at 3.314 shekels to the dollar.  It continued to climb, jumping five more agorot within two hours, closing at 3.38 on Friday, and showed only slight signs of slowing down.

Analysts cautioned, however, against judging the decision based on only two days' worth of exchange rate changes.

The Bank's decision means that Israel's dollar reserves will climb from $28 billion to somewhere between $35-40 billion.  Fischer has received praise for his activist approach, though fears have been expressed that it might lead to increased inflation.

The low dollar has been deadly to exporters, who receive dollars that are worth less and less each day for their merchandise. 

The Bank of Israel has raised interest rates by a half-percent over the past two months, in an attempt to forestall inflation.  Inflation over the past 12 months has reached 5.4%, compared with the Bank of Israel's target level of 1-3%.