Shekel Weakens as Risk of Currency Intervention Reduces Demand

Israel’s shekel weakened the most in more than a week on increased bets the Bank of Israel will intervene to stem the currency’s rally. Benchmark bonds rose.

The currency depreciated as much as 0.5 percent, the most since March 27, before trading at 3.6305 a dollar, at 4:33 p.m. in Tel Aviv. The shekel, which reached a 17-month high this week, strengthened 3.9 percent in the past three months, the best performer among 31 currencies tracked by Bloomberg. The government’s 4.25 percent notes maturing in 2023 yielded 3.86 percent today, down four basis points.

The shekel has been gaining in the run-up to the start of gas production on March 30, which is set to improve the current-account balance by as much as $3 billion this year, according to the central bank. The Israel Export Institute yesterday 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 sharp shekel appreciation increased the likelihood that the central bank will resume currency purchases to help exporters and ensure stability in the economy,” said Rony Gitlin, head of spot trading at Bank Leumi Le-Israel Ltd. in Tel Aviv. “Foreign banks and local investors are closing positions and reducing risk.”

Interest Rates

Bank of Israel 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. The regulator last intervened in July 2011.

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 Israel’s main trading partners, the U.S. and Europe. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell two basis points to 1.62 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 286.14.