Shekel Falls Most in a Week as Fischer Sees Continued Low Rate

Israel’s shekel weakened the most in more than a week after Bank of Israel Governor Stanley Fischer said borrowing costs will remain low for a long time reducing the allure of buying the currency.

The shekel fell as much as 0.7 percent to 3.6944 a dollar, the biggest decline since March 4, before paring to 3.6962 at 4:44 p.m. in Tel Aviv. The currency rose 0.5 percent this month, the sixth-biggest performer 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, fell two basis points to 1.61 percent, the lowest in a week.

Israel can’t allow a large gap to develop with other countries’ interest rates because that would encourage capital inflows and excessive shekel appreciation, Fischer said at a conference today. The Bank of Israel will probably ease rates by a quarter-point to 1.5 percent on March 24 after three cuts in 2012, according to nine out of 17 analysts surveyed by Bloomberg, narrowing the interest rate gap with the U.S.

“The shekel is weakening on expectations that the central bank will lower interest rates to boost economic growth,” said Eytan Admoni, head of the international department at Bank of Jerusalem Ltd. “The central bank seeks to stem the currency’s rally which is hurting exports.”

Exports account for about 40 percent of Israel’s economy, which grew 3.1 percent last year after 4.6 percent in 2011, the Central Bureau of Statistics said March 10. In the fourth quarter, the economy expanded 2.4 percent, slower than the bureau’s previous 2.5 percent estimate.

Currency Volatility

The shekel’s three-month implied volatility, which reflects traders’ expectations of currency fluctuations over the period, fell 10 basis points to 6.90 percent, matching the low on Feb. 20. The yield on the 4.25 percent benchmark securities maturing March 2023 rose three basis points to 4.03 percent.

Annual inflation, which decelerated to 1.5 percent in January from 1.6 percent a month earlier, may average 2.5 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, dropped two basis points to 250. The government’s target range is between 1 percent and 3 percent.

The Tel-Bond 40 Index of corporate bonds was little changed at 284.01.

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