As the dollar shriveled in value versus the shekel, heading southwards to a level of NIS 3.60/dollar, the Bank of Israel decided to intervene to prop up the Israeli currency. The result: Israel’s foreign currency reserves grew by another $200 million, while the shekel rose back up to a level of NIS 3.70/dollar.
But by the close of business Friday, the shekel had begun to strengthen again, closing at NIS 3.66 for the week. It remains to be seen if the Bank will continue to soak up extra dollars again this week.
In a report issued by the Bank last week, it appeared that the effectiveness of buying dollars to prop up their value against the shekel is not as effective as it has been in the past. In 2016, the Bank’s dollar purchases raised the shekel’s value by 0.8 percent, compared to the 1.8 percent increase in the shekel’s value in 2015. The dollar-buying policy stretches back to 2009, and was started in order to ensure that Israel’s exports remained competitive on the international market, the Bank said in its report.
According to investors, however, the world of 2017 is different than that of 2009. Israel’s economy has strengthened considerably, and there is a flood of foreign currency entering the country as a result of the gas discoveries off the country’s coast. The true “value” of the shekel, said investors, can be seen in the Israeli currency’s strength against other currencies, which the Bank of Israel does not support. While the dollar has lost 5 percent of its value against the shekel in the past 12 months, the euro has been down 9 percent, while the British pound has sunk 17 percent.
The Bank of Israel already has over $100 billion in reserves, much of it acquired over the past several years as a result of buying up dollars to keep the shekel’s rate artificially high. Given the strong performance of the economy and of exports, even during a period when the shekel is relatively low against the dollar in historic terms, investors are speculating that the Bank could set a new “low” for the shekel, above which it may not intervene to buy dollars.