Israel’s shekel rallied to the highest level in 16 months as economists’ forecasts that the central bank will refrain from cutting interest rates next week spur demand for the currency.
The shekel strengthened as much as 0.5 percent to 3.6547 a dollar, the highest level since Nov. 2011, before trading at 3.6593 at 4:43 p.m. in Tel Aviv. The currency gained 1.4 percent this month, the second-best performer among an expanded list of 31 major currencies, according to data by Bloomberg.
The Bank of Israel will probably leave the benchmark interest rate unchanged at 1.75 percent on Feb. 25 after three cuts in 2012, according to 13 out of 18 economists surveyed by Bloomberg, maintaining the interest rate gap with the U.S. Central bank policies that took rates to record lows in the U.S. and Europe are supporting the shekel, the bank said in minutes of its last rate-setting meeting released Feb. 11.
“Shekel demand is high as the rate differential with the U.S. is still attractive for investors,” said Eytan Admoni, head of the international department at Bank of Jerusalem Ltd. “Looking ahead rates are not expected to be eased further as the central bank is concerned about rising housing prices.”
Governor Stanley Fischer said Feb. 13 that the central bank is “going to have to watch” foreign inflows as near-zero interest rates in the U.S. have spurred inflows into Israel where borrowing costs are higher, driving gains in currencies. The dollar’s 14-day relative-strength index against the shekel fell to 31 today. Exceeding the threshold of 30 signals to some investors that the greenback may reverse losses.
The Bank of Israel told lenders yesterday to set aside more money against losses from home loans, as it seeks to shield the financial system after house prices and credit surged in part by expansionary monetary policy aimed at boosting growth.
One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell one basis point to 1.64 percent, the lowest since Jan. 1. The yield on the benchmark’s 4.25 percent bonds due in March 2023 declined two basis points, or 0.02 percentage point to 4.02 percent.
The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, was little changed at 213. That implies an average annual inflation rate of 2.13 percent, within the governments 1 percent to 3 percent target range. The Tel Aviv Bond 40 Index, which measures inflation- linked and fixed-rate corporate bonds, increased for a third day, gaining 0.1 percent to 283.49.