Israel’s Shekel Heads for 5th Weekly Drop on Rate Bets

(Corrects headline to remove rate cut.)

Israel’s shekel is set for its fifth weekly decline against the dollar on speculation the Bank of Israel will hold borrowing costs for a third month at its meeting next week.

The currency was little changed at 3.6059 at 3:42 p.m. in Tel Aviv, poised for a weekly decrease of 0.8 percent. The shekel has weakened 5.1 percent this month, the second-worst performer among the 10 most-active Europe, Middle East and Africa currencies, according to Bloomberg data. The central bank will keep its main rate at 3.25 percent on Aug. 29, according to 19 of 20 economists in a Bloomberg survey. One predicts Governor Stanley Fischer will cut the rate to 3 percent.

“The shekel is losing its attractiveness as the rate differential with the U.S. may not widen and may even narrow in the coming months as inflation expectations drop and growth slows,” Eytan Admoni, head of the international department at Bank of Jerusalem Ltd., said by telephone. “Ongoing consumer protests against rising prices and recent attacks are keeping some foreign investors away from the risk associated with the shekel.”

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, were at 3.11 percent, down from 3.23 percent on Aug. 15, before the Central Bureau of Statistics said consumer prices in July fell for the first time in more than a year. The Federal Reserve pledged on Aug. 9 to keep its key interest rate near zero until at least mid-2013 to revive the faltering economy.

Israel became the first country to raise interest rates, from a record low of 0.5 percent in August 2009, spurring inflows into the country, and driving gains in the currency. Since the central bank first held the rate June 27, the shekel has lost 4.5 percent trimming the 12-month gain to 5.8 percent.

Declining Sales

Food sales at chain stores dropped a seasonally adjusted 6.6 percent in July from June, the statistics bureau said Aug. 22, as Israelis reduced purchases amid protests against the high cost of living. Citizens across the country are demonstrating against the high prices of items ranging from cottage cheese, a local staple, to housing, prompting the government to set up a committee to address economic and social welfare issues. Economic growth retreated to an annualized 3.3 percent in the second quarter from a revised 4.7 percent in the first quarter.

Escalating Violence

Three Palestinians were killed and at least 25 injured in Israeli airstrikes on the Gaza Strip overnight and one Israeli was wounded after more than dozen rockets and mortar shells hit the south of the country. Violence has escalated after Aug. 18 attacks near the Red Sea resort of Eilat left eight Israelis dead. At least 14 Palestinians were killed in Israeli strikes following that attack.

The yield on the benchmark Mimshal Shiklit bond due January 2020 rose one basis point, or 0.01 percentage point, to 4.68 percent. The rate on the 5.5 percent notes maturing in January 2022 increased one basis point to 4.84 percent, the highest since Aug. 15.

The two-year breakeven rate, which reflects market expectations for inflation over the time period, rose to 213, implying an average annual inflation rate of 2.13 percent. The yield on the CPI-linked bond due in June 2013 was little changed at 0.96 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, fell for a third day, declining 0.8 percent to 255.36.

To contact the reporter on this story: {Sharon Wrobel} in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net