Israel’s Shekel Weakens to Week Low on Intevention Hints

Israel’s shekel weakened to a one-week low on bets Bank of Israel Governor Stanley Fischer may stem the currency’s rally. Government bonds rose.

The shekel fell as much as 0.5 percent to 3.7118 a dollar, the lowest since Jan. 31, before trading at 3.7042 at 5:34 p.m. in Tel Aviv. The currency, which hit a 15-month high on Feb. 1, strengthened 5 percent in the three months ended Dec. 31, the biggest gain among an expanded list of 31 major currencies tracked by Bloomberg. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, which were unchanged at 1.7 percent, fell six basis points last week.

Fischer on Feb. 7 praised the Swiss National Bank for foreign-currency market intervention as pressure mounts from Israeli manufacturers to intervene to stabilize the shekel-dollar exchange rate. “You can fight the market, if the market wants your currency to appreciate,” Fischer said at a conference in Prague.

“We are seeing investors closing short positions after Fischer’s hint that the central bank is prepared to intervene as necessary,” said Moshe Nir, a trader at Mercantile Discount Bank Ltd. in Tel Aviv. “At the current levels, we are unlikely to see any action which could change if the exchange rate is in the range of 3.63 to 3.60 a dollar.”

Currency Purchases

The central bank began buying foreign currency in March 2008 through last summer to help moderate gains in the shekel and support exporters. Since September 2011, the regulator has gradually cut the key interest rate by 1.5 percentage points to 1.75 percent to spur the economy, whose exporters have suffered from a strengthening shekel and a fallout of the European debt crisis.

Israel derives 40 percent of its gross domestic product from exports. Economic growth slowed to 3.3 percent last year from 4.6 percent in 2011, according to the statistics bureau.

The SNB imposed a ceiling of 1.20 francs to the euro in September 2011 to help exporters. To protect the limit, policy makers stepped up euro purchases piling up record foreign-currency reserves, with holdings rising more than 50 percent since the ceiling was introduced.

“The Swiss are extremely conservative, well this was not extremely conservative, this was extremely not conservative and so far, it’s working,” Fischer said.

Gas Flows

Gas flows from Israel’s Tamar field are set to start by the second quarter of this year, enabling the country to reduce its dependence on imports and improve its current account balance. For every $1 billion improvement in the balance, the exchange rate should appreciate about 1 percent, the Bank of Israel has estimated.

“The use of offshore natural gas reservoirs, expected in 2013, will contribute to an increase in the current account surplus, and thus will also be a factor supporting the appreciation of the shekel in the coming year,” according to the minutes of the central bank’s last interest rate meeting released today.

The yield on the 4.25 percent securities maturing March 2023 fell one basis point, or 0.01 percentage point, to 4.05 percent, the lowest since Jan. 28 at the close in Tel Aviv, after the government sold debt at an auction today. The yield on the 2.5 percent notes due May 2016 was unchanged at 2.3 percent. Investors sought 4.4 times the 250 million shekels ($68 million) of the 2016 notes on sale compared with 2.4 times the same amount sold at last week’s sale, Finance Ministry data posted on Bloomberg show.

Annual inflation, which unexpectedly accelerated to 1.6 percent in December from 1.4 percent a month earlier, may average 2.13 percent in the next two years, according to the two-year break-even rate. The rate, which reflects the yield difference between the inflation-linked bonds and fixed-rate government notes of similar maturity, retreated three basis points to 213. The government’s target range is between 1 percent and 3 percent.

The Tel-Bond 40 Index of corporate bonds was little changed at 283.56.

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