Bank of Israel
Bank of IsraelIsrael news photo: Flash 90

As the shekel reached a three year high against the dollar Wednesday, the Bank of Israel accelerated its dollar-buying program – but to no avail. Despite sopping up no less than $100 million off the foreign currency market, the shekel barely moved against the dollar Thursday – falling a paltry 0.15% before beginning its march back up later in the day. The shekel's midday value versus the dollar was NIS 3.444, the highest seen since May 2011.

The strong shekel makes exporting from Israel much more difficult. The lower the value of the dollar, the more expensive Israeli exports become in dollar terms, and the less competitive Israeli products are on foreign markets.

The shekel's strength is due to a number of factors, including the expected influx of foreign currency in the wake of upcoming sales of gas from Israel's offshore fields, and Israel's relatively higher interest rates.

One traditional way to correct the value of the dollar has been to cut interest rates, causing investors to sell shekels and lower their value relative to the dollar. However, that tends to cause inflation, and the Bank of Israel has been reluctant to cut rates too much. In recent statements, the Bank has indicated that it is unlikely to continue cutting interest rates on a regular basis, as it has been doing until now.

The Israeli branch of international foreign currency trading firm FXCM said Thursday that the dollar was in danger of “collapsing” versus the shekel if the Bank did not intervene even more aggressively. “It's hard to pin down the levels of support for the dollar that will ensure stability. Currently the speculators are controlling the market, and they may push the dollar level down to NIS 3.42 or even NIS 3.40.”