Shekel Jump Fuels Bets Bank of Israel to Buy Dollars for Economy

The shekel appreciated to an 18-month high, prompting bets the Bank of Israel will purchase dollars for the second time this month to weaken the currency and support the country’s export-driven economy.

The shekel advanced 0.5 percent to 3.5884 a dollar, the strongest since October 2011, at the U.S. market close. The central bank bought U.S. dollars on April 8 for the first time in almost two years after the shekel rose to as much as 3.5898 a dollar. The currency has appreciated 4.1 percent this year, making it the second-best performer after the Mexican peso among a basket of 31 major currencies tracked by Bloomberg.

Israel’s base lending rate at 1.75 percent isn’t low enough to stop capital inflow affecting the shekel exchange rate, Bank of Israel Governor Stanley Fischer said in Jerusalem today. The currency’s appreciation has also been driven by the start of domestic natural gas production and on prospects the government will take long-term steps to boost economic growth.

“The shekel is hovering below the 3.60 level, testing the levels at which the central bank is again likely to intervene,” Rony Gitlin, head of spot trading at Bank Leumi Le-Israel Ltd. in Tel Aviv, said by phone. “The central bank may need to increase the amount of dollar purchases to have an impact on weakening the currency.”

The Bank of Israel has gradually reduced the borrowing rate from 3.25 percent in 2011 in an effort to shore up the economy amid the European debt crisis. The gap between Israel’s benchmark interest rate and those in major economies is also spurring investment in the country’s bonds, Fischer said on April 23. The next base rate announcement is on May 27.

Living Costs

The yield on the benchmark’s 4.25 percent bonds due in March 2023 slumped eight basis points, or 0.08 percentage point, to 3.55 percent, the lowest on record at the close in Tel Aviv, after demand for the securities rose at a debt sale today. Investors sought 6.6 times the 250 million shekels ($70 million) on sale, up from 6.3 times at the last sale on April 22, according to ministry data posted on Bloomberg.

The Israeli cabinet yesterday approved steps to bring down car prices by at least 20 percent to increase competition in imports and sales of new and used cars. Prime Minister Benjamin Netanyahu said yesterday the government is taking steps to reduce the cost of living “on land, sea and air.”

Fitch reaffirmed Israel’s A rating on April 25, saying the start of gas production will boost economic growth to 3.7 percent this year from 3.2 percent in 2012.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped four basis points, the most since April 19, to 1.57 percent.

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