Israel to continue foreign exchange intervention

Bank of Israel Governor Stanley Fischer has managed to curb the shekel-dollar's rise in recent years through an aggressive U.S. dollar purchasing policy.

Analysts believe Fischer's strategy was not likely to change any time soon, but saying that it was not clear how much longer his strategy would work.

Israel's central bank bought 700 million US dollars last week when the dollar-shekel exchange rate dropped to a new two-year low of 3.56 shekels. The representative rate was set at 3.59 shekels in October 2008. Following the purchase, the shekel softened against the dollar, slipping back to 3.6 shekels to the dollar.

Fischer had also bought 300 million dollars a week earlier but failed to curb the rising shekel, which gained 1.6 percent against the dollar that week.

Fischer has said he will continue to buy foreign currency to prevent the shekel from strengthening against the dollar and thereby harming Israeli exports, which make up 40 percent of the country's economic activity.

"The Bank of Israel is not a bank of profits," he said, noting that safeguarding the country's exports was more important than losing profits from buying and holding a weak dollar.

BOI -- AN FOREIGN EXCHANGE INTERVENTION PIONEER

The Bank of Israel was one of the first among central banks to begin buying up dollars when global trade shrank during the past few years as a result of the global financial crisis.

Central banks in financially stronger emerging markets around the world soon followed suit in order to devalue their respective currency and benefit local industries.

With an increasing number of states intervening in the foreign currency market, however, those who refrain from taking matters into their own hands stand to lose as their exports become more expensive and their markets are flooded with relatively cheaper imports.

As Fischer attends the annual meetings of the International Monetary Fund and the World Bank Group in Washington DC over the weekend, the world system of foreign exchange is a topic of a major debate.

Israel has so far been allowed to interfere in the foreign currency market to shore up the shekel as its economy is small in international terms, but with the lingering threat of a global currency war and a potential trade war, that could change.

However, Jonathan Katz, an economist at HSBC, told Xinhua that Israel's foreign exchange intervention was not likely to change any time soon.

"Though forex intervention is a big issue now at the IMF, the focus is not likely to be on Israel, as a small country," Katz said.

He noted that Fischer's intervention policy was not likely to change, even if international pressure was exerted. "I think he is pretty set in his ways and don't see Israel's intervention being a big issue for the major economies," he said.

Analysts said Fischer had no choice but to keep buying dollars as there was upward pressure on the Israeli currency due to both domestic factors as well as international trade conditions.


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