Israeli shekel hits fresh two-year high

Israel’s currency has hit its strongest level in more than two years after the country’s central bank held interest rates as expected but warned again that the strong shekel was weighing on exports.

The dollar traded below 3.66 shekels for the first time since October 2014, a fall of 0.8 per cent on the day, after the Bank of Israel kept rates at a record low of 0.1 per cent.

The central bank reiterated its previous month’s warning that the currency’s strength was continuing to weigh on exports, leading analysts to conclude that it would not be ending its interventions in the foreign exchange market any time soon.

Foreign exchange reserves have swelled from around $41bn at the start of 2009, when the central bank began intervening, to $101.6bn in January.

The central bank said the economy had continued to improve and repeated guidance that it intends to increase interest rates to 0.25 per cent “within about a year”.

In addition to Israel’s strong economy, the shekel has risen along with other emerging market currencies this year as an initial dollar rally in the wake of the US presidential election in November faded. It is up nearly 5 per cent in the year to date against the dollar, making it the sixth-best performing major currency against the greenback.

Win Thin, a currency analyst at Brown Brothers Harriman, said:

Inflation is picking up, while economy is growing nicely and so I see very little risk of further monetary stimulus. However, they don’t like the firmer shekel. I think they will keep intervening to weaken the currency.

Policymakers know they can’t reverse it, but have simply been trying to slow the pace of shekel appreciation. Strong fundamentals favor the shekel, but it also gains with the rest of EM FX.

(Chart: Bloomberg.)