Flug Flags Speculative Investments; BOI Buys More Dollars to Keep Shekel Down

The Bank of Israel building in Yerushalayim. (REUTERS/Ronen Zvulun, File)


Foreign-currency speculators have been active on a scale of $4.5 billion worth of purchases in shekels so far this year, Governor of the Bank of Israel Dr. Karnit Flug told the Knesset Finance Committee on Tuesday.

Foreign residents were identified as those responsible. BOI marketing department head Andrew Abir said these were largely short-term, speculative, investments.

“Part of the reason is the attractiveness of the Israeli economy, and part is the desire for short-term gains,” Flug said.

She pointed out that other countries besides Israel, such as Denmark and Switzerland, have imposed measures to protect their currencies against unwanted appreciation. “It’s a game, and this is a signal that makes it difficult for these people to make an easy profit,” Flug said.

Meanwhile, the bank resumed aggressive intervention to maintain the shekel-dollar exchange rate, though with limited results.

FXCM Israel said in its daily review on Tuesday morning that the effect of a purchase of about $300 million in foreign currency has been only temporary.

“After the shekel-dollar exchange rate fell to NIS 3.61/$ Monday…the intervention pushed the rate above NIS 3.62/$ for a while but the effect was modest, and we now see that impact fading away.”

FXCM concluded that the Bank cannot override current conditions.

“It seems that without a change in the circumstances of the dollar on global markets, where the dollar index is at a 6-year low, the Bank of Israel will be unable to change the shekel-dollar trend by itself.”

Flug explained that the interventions are designed to help Israeli exporters, as well as the economy as a whole.

“When you close a plant because of excessive shekel appreciation, you don’t open it again when the exchange rate returns to its natural position. In addition, inflation is significantly below the target, and the steep shekel appreciation is further depressing inflation. One of the reasons why we are buying foreign currency is therefore to help inflation return to the target range. We could use a negative interest rate, as our trade partners did, but that causes all sorts of damage. In view of the risks incurred through a negative interest rate, we need another policy tool — intervention in the foreign exchange markets.”