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Business & Finance

Bank of Israel to buy $30 bln of forex in 2021 to stem shekel surge

  • The shekel earlier in the day reached 3.11 per dollar, its strongest level since 1996. It changed directions after the bank's announcement, weakening to 3.19.
  • The central bank said the policy change would also support the economy against the ramifications of the COVID-19 crisis.
14 Jan 2021

JERUSALEM: The Bank of Israel plans to buy $30 billion of foreign currency this year after the shekel appreciated sharply on Thursday to a 24-year peak against the dollar.

The shekel earlier in the day reached 3.11 per dollar, its strongest level since 1996. It changed directions after the bank's announcement, weakening to 3.19.

"What we're trying to do here is to give certainty to the market about our intentions" over the exchange rate and the shekel's appreciation, Bank of Israel Deputy Governor Andrew Abir told Reuters.

The central bank said the policy change would also support the economy against the ramifications of the COVID-19 crisis.

Now one of the world's strongest currencies, the shekel has appreciated more than 10% against the dollar since the start of 2020 - 3 percentage points coming since the start of 2021 - unfazed by $21 billion in foreign currency purchases by the central bank last year.

Governor Amir Yaron previously appeared to downplay the shekel's strength, including at last week's interest rate decision, pointing to a broadly weak dollar and calling the reasons for the shekel's strength "mostly good". He reiterated the central bank would still intervene in the market when necessary.

In recent months, the central bank said, foreign currency flows into Israel's economy have intensified due to growth in the current account surplus, direct investments, large-scale foreign currency sales by institutional investors against their investment profits in capital markets abroad, and an increase in foreign investment in Israeli government bonds.

Abir said the decision to signal to the market its intentions in advance came after weeks of discussion and trying to talk the shekel down failed.

"While these discussions were going on the words weren't that useful in terms of the market. What was needed was action," Abir said.

The bank will monitor the effects of its policy change over the next few weeks to see if anything else needs to be done.

"It doesn't rule out other policy measures," Abir said. "We think this is the most appropriate policy to activate now."

He added that although Israel has rapidly been vaccinating its citizens, the economy is still struggling with double digit unemployment and it will take time economy to recover.

"This is not the time to take risks with the economy," Abir said.