JERUSALEM (Reuters) - A nearly 10-year peak for Israel's shekel against the dollar ILS= is not overly worrisome for central bank policymakers since those gains have been largely offset by a stronger euro, Bank of Israel Deputy Governor Andrew Abir told Reuters.
Citing a global “dollar move”, Abir said the central bank was more focused on the shekel’s valuation against a basket of currencies of Israel’s largest trading partners, led by the dollar, euro and Chinese yuan.
The shekel is up some 2.5% this year against the trade-weighted basket -- which has stuck to a narrow range during the coronavirus pandemic and is now at a historic high -- but is 3% weaker versus the euro EURILS= in 2020.
“Just looking at the dollar is a problem,” Abir said in an interview. “We can’t change the value of the dollar in the world, so if the dollar is selling off against the euro and other currencies ... we’re not going to be an island in this respect. So we very much look at the trade-weighted basket.”
While the United States is Israel’s biggest single export destination, the European Union is its largest overall trading partner.
The Israeli currency this month reached its highest level against the greenback since mid-2011, at 3.35 shekels per dollar, a strengthening from 3.46 at the start of the year.
Those gains have been helped by a high correlation with Israel’s technology sector and a continuation of robust foreign direct investment despite the COVID-19 pandemic, Abir said.
The central bank has bought $14 billion in forex so far this year and $130 billion since its intervention policy started in 2008, and Abir said policymakers remain committed to slowing the shekel’s appreciation by intervening in the market where needed.
“The real economy is in a situation where a further appreciation of the shekel would not be helpful,” he said, pointing to exporters.
WATCHING AND WAITING
On Aug. 24, the Bank of Israel held its benchmark interest rate ILINR=ECI at 0.1% for a third successive time after lowering the rate from 0.25% in early April.
The monetary policy committee has been reluctant to cut rates further, preferring measures such as buying currency and government and corporate bonds.
Abir said the MPC was looking to see the impact of prior policy steps before potentially acting again. He said the results have been "pretty good" since the government's benchmark 10-year bond yield ILGOI0330=TA stands at 0.7%, enabling the state to finance its huge deficit at very low costs, while corporate bond issuance has risen.
“If we would see a worsening of the situation in the capital markets then we have plenty of tools we can roll out to deal with this problem,” Abir said, stressing the bank would not necessarily wait until its next policy meeting on Oct. 22.
“Lowering rates further is a possible tool, enlarging the QE programme is another possible tool, and there are others.”
Abir said that while monetary policy is important to help Israel’s economy recover, fiscal policy is even more vital. Israel has been without a proper budget for two years and political issues have prevented passage of a 2021 budget.
“The country needs a new budget and new reforms so that we can get through this period in the best possible condition,” he said.
The absence of a budget and a surge in COVID-19 cases meant the risk that growth and unemployment will develop in line with the central bank’s “pessimistic” scenario has risen, Abir said.
Reporting by Steven Scheer; Editing by Catherine Evans
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