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Shekel Weakens on Concern Egypt Gas Halt May Stoke Mideast Risk

Israel’s shekel was set for the biggest decline in almost three weeks as demand for riskier assets waned on concern Egypt’s decision to halt a natural gas supply agreement may fuel Middle East geopolitical tensions.

The currency dropped 0.3 percent to 3.7618 a dollar, headed for the biggest drop on a closing basis since April 3, at 1:40 p.m. in Tel Aviv. That brings the monthly decline to 1.4 percent. It earlier fell 0.5 percent, the most since April 18. The Tel-Bond 40 index of corporate bonds fell for the first time in more than a week, declining 0.2 percent to 267.51. The TA-25 Index (TA-25) retreated 1.3 percent, the most in more than a week.

Ampal-American Israel Corp. (AMPL), which owns a stake in a company that exports natural gas from Egypt to Israel, said it was advised by East Mediterranean Gas Co. that Egyptian General Petroleum Corp. and the Egyptian Natural Gas Holding Co. were terminating the gas-supply agreement. Israel’s Finance Ministry said it views “with great concern” the termination and warned the step could damage peace agreements between the countries.

“Investors are turning away from the shekel as Egypt tension is increasing geopolitical risk in the region,” said Eytan Admoni, head of the international department at Bank of Jerusalem (JBNK) Ltd. “The local currency is also weakening as interest rates are expected to remain low in coming months and the dollar is gaining around the world on renewed concern about the crisis in Europe.”

European Risk

The Bank of Israel may keep the benchmark interest rate at 2.5 percent, according to all 24 economists surveyed by Bloomberg. The bank will announce its decision at 5:30 p.m. today. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, rose two basis points to 2.59 percent.

Israel’s trade deficit widened in March as exports of goods declined amid renewed debt turmoil in Europe, one of the country’s main trade partners. The deficit, excluding polished diamonds, ships and aircraft, widened to a seasonally adjusted $2.07 billion from a revised $1.88 billion the previous month, the Jerusalem-based Central Bureau of Statistics said today.

In Europe, Dutch bonds fell on speculation the Netherlands will need to hold early elections, derailing efforts to stem Europe’s crisis. France’s notes slid after election results showed Socialist Francois Hollande took a greater share of the first-round vote than President Nicolas Sarkozy.

Italian consumer confidence plunged to the lowest in more than 15 years in April as Prime Minister Mario Monti’s austerity drive deepens the recession in Europe’s fourth-biggest economy. The yield on the 5.5 percent notes due January 2022 rose one basis point, or 0.01 percentage point, to at 4.68 percent.

15-Year Deal

Ampal’s 15-year gas agreement, valued at $2.5 billion and signed in 2005, had already been interrupted sporadically as the Sinai pipeline that carries the fuel was bombed 14 times since the start of Egypt’s political turmoil. The latest such attack took place on April 8.

The Finance Ministry sold a combined 1.4 billion shekels ($372 million) of bonds at an auction today. The sale included 250 million shekels each of the benchmark notes, the 3.5 percent bonds due August 2014, and the inflation-linked bonds due May 2017, according to ministry data posted on Bloomberg. Investors bid for 5.1 times of the benchmark debt on sale compared with 4.7 times at the April 16 sale.

The two-year break-even rate, the yield difference between inflation-linked bond and fixed-rate government bonds of similar maturity, fell two basis points to 294. That implies an average annual inflation rate of 2.94 percent.

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

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