The shekel reached a four-month high against the dollar on Friday as the shekel-dollar rate sank to 3.94, the lowest in four months. The drop in the exchange rate completes a dramatic five percent rise in the shekel, which now is worth nearly 25.5 cents compared with 23.5 cents a month ago.
The local currency’s rapid growth makes it the second strongest currency in the world against the dollar and is similar to the strength it enjoyed a year ago when the rate was below 3.30 and the shekel was worth 31 cents.
Bank of Israel Governor Stanley Fischer, worried that the strong shekel would decimate exports, stepped in with massive multi-billion shekel purchases of the dollar. Coupled with lower economic growth and government instability during the Olmert administration, the shekel turned around and gradually moved upwards to the level of four shekels to the dollar.
Fears of a deeper recession than expected, inflation and a huge government deficit pushed the rate up to NIS 4.25 in early March. The trend turned around swiftly last week as rumors spread that Fischer has bought enough dollars. Despite his denials that the buying program is dwindling down, speculators sold off the greenback and banked on the shekel.
Another attraction to the shekel for foreign investors is the relatively high return on long-term government bonds, which give investors a return of 5.5 percent compared with 3.5 percent for U.S. government bonds.
Fischer’s reaction to the latest strength in the shekel may depend on whether speculators drive down the shekel-dollar rate even further, which would mean that exporters who are paid in dollars received less shekels for their products.
Last year, Fischer did not step in until the rate sank well below NIS 3.50. A projected high government deficit and the specter of rising inflation may offset further strength in the shekel. The government’s proposed hike in the value added tax (VAT) coupled with a return to higher fuel prices will put upward pressure on the consumer price index.
Fuel prices are expected to rise nearly 10 per cent next week following a surprise five percent rise this week after the Finance Ministry hiked the fuel tax to help reduce the deficit.
One other factor that could cause a dramatic change in the shekel-dollar rates is the amount of gas that has been discovered off the Israeli Mediterranean coast. If further reports indicate a higher field, or if more discoveries are reported, the shekel-dollar rate could quickly return to below NIS 3.50 regardless of Bank of Israel purchases of the dollar.