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Israel Shekel Climbs to 17-Month High as Budget Cuts Seen

March 25 (Bloomberg) -- Israel’s shekel headed for the highest close in 17 months after the country last week normalized ties with Turkey and yesterday’s comments by the central bank fueled bets interest rates could rise.

The currency strengthened 0.7 percent to 3.6293 a dollar, poised for the highest close since October 2011, at 3:18 p.m. in Tel Aviv. The shekel, up 2.9 percent this year, was the second-best performer among 31 major currencies tracked by Bloomberg today after the South Korean won. European stocks climbed and Treasuries declined as Cyprus reached an accord with creditors on an international bailout. Israeli markets are closed today and tomorrow for a holiday.

The Bank of Israel yesterday kept its benchmark interest rate at 1.75 percent as it focused on rising housing prices in the country and said that the likelihood of a global economic crisis is receding. Israeli Prime Minister Benjamin Netanyahu and his Turkish counterpart Recep Tayyip Erdogan agreed March 22 to reinstate ambassadors.

“The improved relationship between Israel and Turkey” is boosting the shekel in addition to the Cyrus agreement and the Bank of Israel decision, Gaelle Blanchard, an emerging-markets strategist at Societe Generale SA in London, said by e-mail. “It’s rather positive on the geopolitical front as Israel is less isolated.”

Rate Increase

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, added six basis points, the most since Jan. 2, to 1.65 percent. On the global front, while the macroeconomic picture is “mixed,” the high level of uncertainty that prevailed in the past year has been reduced, the central bank said.

“The next step will be a rate increase, but that step will be decided on by the next governor, and it probably will happen toward the end of the year,” Alex Zabezhinsky, chief economist at Tel Aviv-based DS Securities & Investments Ltd., said yesterday. Fischer will leave the central bank at the end of June.

Sixteen of the 21 economists surveyed by Bloomberg forecast the central bank would hold rates, while the remainder predicted a quarter-point cut. The central bank also cited the new government’s fiscal challenges in its decision. To abide by Israeli budgetary rules, the government must reduce spending commitments this year by 13 billion shekels ($3.6 billion), it said.

Netanyahu and Finance Minister Yair Lapid are considering cuts in the defense budget, child allowances and public sector employee benefits, Channel 2 and the Ynet website reported. Lapid has said that cuts will have to be made “where it hurts.”

Israel last year posted a current-account deficit of $199 million, compared with a revised surplus of $3.4 billion in 2011 and $8.1 billion in 2010, the Central Bureau of Statistics said March 14.

To contact the reporter on this story: Robert Lakin in Tel Aviv at rlakin1@bloomberg.net

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

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