* Bank of Israel bought estimated $100 mln of forex
* First intervention since July 2011
* Natural gas production helping to boost shekel
By Steven Scheer
JERUSALEM, April 10 After standing by for
months, the Bank of Israel has finally run out of patience and
could face a lengthy battle to rein in the shekel as Japan's
massive stimulus drives funds into emerging markets.
The shekel has gained more than 5 percent over the past four
months against the dollar and the euro, posing a risk to
Israel's exports which account for 40 percent of economic
Japan's announcement last Thursday that it planned to pump
$1.4 trillion into its economy in less than two years is seen as
a catalyst that will drive capital flows into higher-yielding
emerging market assets, prompting the Bank of Israel to step
into the market on Monday for the first time since July 2011.
Japan's move and weak U.S. jobs data on Friday pushed
dollar-shekel below what was believed to be a
psychologically important 3.6 level for a fresh 17-month low.
Gaelle Blanchard, an emerging markets strategist at Societie
Generale, said those events "changed the mood in the market."
"You see the impact in all emerging market currencies.
Everything is booming now," she said. "People need to invest
money and are trying to find a good place."
The shekel has been one of the best-performing emerging
market currencies this year, reflecting Israel's relatively
strong economy and high interest rates and expectations that the
start of natural gas production last month will improve the
government's fiscal position.
After cutting interest rates four times last year, the
central bank has kept them steady over the past three months.
That suggests it will use intervention as its main tool to
weaken the shekel since lowering its benchmark interest rate,
now at 1.75 percent, could further inflame Israeli housing
prices, which have rallied 50 percent in four years.
"They are in a trap," said Tal Zohar, chief executive of
forex broker FXCM Israel. "They don't want to reduce rates so
not to increase the housing bubble but they want a weak shekel."
Israel's economy and finances are set to benefit from the
start of natural gas production last month at the Tamar field
off the Mediterranean coast, which will save the country's
electricity utility the expense of having to import expensive
Natural gas production is expected to add 1 percentage point
to economic growth this year, which the Bank of Israel forecasts
at 3.8 percent.
Tamar and the larger Leviathan field nearby, which comes
online in 2016, will probably export natural gas. The central
bank has supported a finance ministry proposal to set up a
sovereign wealth fund for income from the two fields to keep the
shekel in check in the long run.
TEST OF RESOLVE
Israel's exports of goods, which mostly head to Europe and
the United States, grew only 0.1 percent last year and leading
exporters have been calling for central bank intervention to
tame the shekel for some time.
"The intervention was more of a signal than actual policy,"
Zohar said of Monday's action.
"What they (the Bank of Israel) are doing is trying to push
back the speculators who are weakening the dollar ... They are
saying 'we are looking at it very carefully,'" he said.
Since the intervention, the dollar has recovered to 3.64
shekels while the euro has strengthened to 4.76
shekels from 4.66. But dealers say short-term investors have
been helping drive the shekel higher and expect them to test the
central bank's resolve again.
"It's only a matter of time until they test the bank of
Israel again," said a dealer at Israel Discount Bank. "It looks
like each side is waiting for the other side to move."
Zohar expects dollar-shekel to move back to 3.70 in the next
few months while Blanchard sees it at 3.65 at the end of June.
The central bank said on Monday it "will act in the foreign
exchange market in the event of unusual movements in the
exchange rate which are inconsistent with the underlying
economic conditions or when conditions in the foreign exchange
market are disorderly."
During its last interventions between March 2008 and July
2011 the bank bought some $50 billion of foreign currency,
mainly dollars, to keep the shekel in check. Analysts doubt the
current round will be so large, particularly as current foreign
exchange reserve levels of nearly $80 billion are sufficient.
(Editing by Susan Fenton)