Bank of Israel Buys Dollars as Shekel Jumps to 18-Month High

The Bank of Israel bought U.S. dollars for the first time in almost two years in a bid to weaken the shekel after the currency rallied to an almost 18- month high, traders said. The shekel pared gains.

The central bank bought at least $100 million, said Moshe Nir, a trader at Mercantile Discount Bank Ltd. in Tel Aviv. Rony Gitlin, head of spot trading at Bank Leumi Le-Israel Ltd. in Tel Aviv, confirmed the purchases while declining to give an estimate on the amount. The Bank of Israel, which last intervened in July 2011, confirmed in a statement on its website that it had “acted” in the currency market today.

“With the shekel at these levels the central bank felt that it had to step in,” Nir said. “It’s pretty significant given the bank’s absence from the market for so long.”

The shekel climbed as much as 1.1 percent to 3.5898 a dollar before trading 0.2 percent higher at 3.6213 per dollar by 11:07 a.m. in New York. The currency was the best performer over the past six months among 31 major currencies tracked by Bloomberg, as gas production began on March 30, improving the current-account balance by as much as $3 billion this year, according to the central bank.

Governor Stanley Fischer, who will step down at the end of June, is credited by some economists with helping the nation weather the world financial crisis by buying foreign currency to curb shekel strength and support exports. Reserves, which stood at $77.3 billion at the end of February, more than doubled as a result of the purchases, which ended in July 2011.

Export Effect

The Israel Export Institute this month urged the central bank to resume currency buying as exports, making up about 40 percent of the economy, fell by an annualized 6.5 percent in the fourth quarter. Economic growth eased to 2.4 percent, the slowest pace in more than three years.

The shekel’s gain has also been partly driven by the Bank of Israel’s decision to hold its key borrowing rate at 1.75 percent for a third month in March, giving the nation’s relatively higher rates than its main trading partners, the U.S. and Europe. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, increased three basis points to 1.61 percent.

U.S. Secretary of State John Kerry today arrived in Israel to revive Middle East peace negotiations by floating a 2002 Saudi-inspired plan to Israeli and Palestinian leaders. President Barack Obama has charged Kerry with restarting talks between the Palestinians and Israel. In Istanbul, Kerry yesterday publicly urged Turkey to mend ties quickly with Israel.

Foreign Interest

“The efforts to bring stability to the region and to lower geopolitical risk is another positive driving gains in the shekel,” Eytan Admoni, head of the international department at Bank of Jerusalem (JBNK) Ltd., said today by phone before the central bank intervention. “We are seeing interest in the currency from foreign banks.”

The yield on the country’s 4.25 percent benchmark notes due March 2023 fell seven basis points, or 0.07 percentage point, to 3.8 percent after demand rose at a state debt auction. Investors sought 6.7 times the 250 million shekels ($69 million) of the benchmark bonds sold at the auction, up from 3.8 times the same amount offered last week, ministry data posted on Bloomberg show. The Finance Ministry sold a combined 1.3 billion shekels of bonds at the auction.

Annual inflation, which was steady at 1.5 percent in February, may average 2.39 percent in the next year, according to the one-year break-even rate. The rate, which reflects the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, fell four basis points to 237. The government’s target range is between 1 percent and 3 percent.

Israel posted a deficit of 4.6 billion shekels in the first quarter of this year compared with 1.6 billion shekels during the same period last year, the Finance Ministry said today. The Tel-Bond 40 Index of corporate bonds declined 0.1 percent to 286.31.

To contact the reporters on this story: David Wainer in Tel Aviv at dwainer3@bloomberg.net; 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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