Shekel Rally May Force Karnit Flug to Act More Like Stanley Fischer

  • BOI needs to boost FX buying if currency rises to 3.8/$: Prico
  • Shekel appreciated most among global peers on Friday

To stem the shekel’s increase, Bank of Israel Governor Karnit Flug may have to purchase dollars at a level not seen since her mentor Stanley Fischer led policy makers.

Israel’s currency strengthened the most among 31 global peers tracked by Bloomberg on Friday, erasing the dollar’s gains against the shekel this year. The central bank will need to ramp up foreign-currency purchases if it gains toward 3.8 per dollar, according to Prico Group, Israel’s biggest private foreign-exchange broker. Flug in January bought $300 million, the least since September, taking reserves to $90.5 billion, according to central bank data.

“Flug is a student of Stanley Fischer and the central bank could buy billions of dollars, similar to what it did when Fischer was governor,” said Yossi Fraiman, Prico’s chief executive officer. “Foreign currency reserves could reach $100 billion without a problem. For the central bank, there’s nothing to lose.”

The shekel’s strength has been an ongoing battle for Israel’s monetary policy committee, headed by Flug. Weakening the currency is key to her strategy to spur growth in Israel’s export-driven economy, following the slowest annual expansion in six years. The shekel strengthened to about the same level one year ago, before Flug surprised the market and cut interest rates to a record 0.1 percent. Another cut probably won’t be enough to weaken the shekel, Fraiman said.

Fischer more than doubled the central bank’s international reserves during his eight-year tenure to help the economy recover from the global financial crisis. He purchased about $12 billion of foreign currency in 2010, compared with Flug’s acquisition of $8.8 billion last year, the most she’s ever bought.

The shekel strengthened 0.5 percent to 3.8818 against the dollar on Friday after investors who bet the currency would weaken past 4 per dollar closed those trades, according to Fraiman. It weakened 0.3 percent to 3.8938 as of 5:30 p.m. in Tel Aviv.

There’s a 64 percent probability that the shekel will strengthen to 3.8 per dollar by the end of June this year, options data compiled by Bloomberg show. The central bank will hold its next interest rate decision on Feb. 22. All 13 economists surveyed by Bloomberg predict no change.

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