Shekel Weakens From 2-Month High as Bank of Israel Buys Dollars

Israel’s shekel weakened the most in almost three weeks after the Bank of Israel bought dollars to stem a rally that took the currency to a two-month high.

The shekel depreciated as much as 0.7 percent against the dollar, before trading 0.6 percent lower, the biggest decline since June 28, at 3.5755 a dollar as of 5:53 p.m. in Tel Aviv. The central bank bought an estimated $35 million, according to Eytan Admoni, head of the international department at Bank of Jerusalem Ltd. in Tel Aviv. Bank of Israel spokesman Yossi Saadon declined to comment.

The Bank of Israel intervened after the shekel strengthened 0.5 percent yesterday to 3.5593 a dollar, taking it below its level on May 13, the day the regulator unexpectedly cut interest rates and announced a program to buy foreign currency to limit the rally. The shekel has appreciated 4.3 percent in 2013, the best performer among 31 major currencies tracked by Bloomberg.

“Local and foreign investors are continuing to find the shekel attractive, prompting the central bank to intervene in an effort to moderate the pace of the currency’s appreciation,” Admoni said. “It will be hard for the central bank to reverse the trend of the shekel’s gains as the country’s interest-rate differential with its trading partners lures inflows.”

The central bank has lowered its base lending rate to a three-year low of 1.25 percent, compared with near-zero rates in the U.S. and 0.5 percent in the euro region.

‘Aggressive’ Intervention

The Bank of Israel restarted a foreign-currency purchase program in April to limit the shekel’s appreciation because it makes exports less competitive. Israel relies on exports for 40 percent of economic output. Under the program announced in May, the regulator said it will buy $2.1 billion by the end of 2013.

The central bank’s Deputy Governor Karnit Flug has served as interim governor since Stanley Fischer stepped down at the end of June. Jacob Frenkel, who served as Bank of Israel governor between 1991 and 2000, was nominated by Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid to replace Fischer.

The shekel’s appreciation took it to 83.8 against the currency basket on July 15, according to data compiled by Bloomberg. The surprise interest rate cut on May 13 occurred when the rate was around these levels and this “increases the likelihood for another rate cut and for more aggressive FX intervention by the central bank,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd., wrote in an e-mailed note today.

Frenkel’s appointment is still subject to the approval of a committee that vets senior civil-service appointments, as well as the Cabinet. Israel’s attorney general will start a probe into the nomination after Haaretz reported that Frenkel was briefly detained seven years ago, the Justice Ministry said yesterday.

The yield on the government’s 4.25 percent bonds maturing in March 2023 fell four basis points, or 0.04 of a percentage point, to 3.72 percent, the lowest since May 29.

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