In recent news, the Bank of Israel has announced that it is planning on investing $30 billion in foreign currency in the year 2021. This announcement came right after the shekel surged sharply to a 24-year peak as compared to the dollar, on Thursday.
Earlier in the day, the shekel had reached 3.11 per dollar, which is its strongest level since the year 1996. However, after the bank made this announcement, the currency changed directions and weakened to 3.19.
Andrew Abir, the Deputy Governor of the Bank of Israel, stated that by investing in foreign currency, the bank is only trying to provide certainty to the market regarding their intentions.
The central bank also talked about the appreciation of shekel and the exchange rate, saying that the policy change will offer relief to the economy against the negative repercussions of the coronavirus crisis.
As of now, one of the strongest currencies in the world, the shekel, has appreciated more than 10% in value against the dollar since the beginning of the year 2020. 3 of these percentage points came soon after the start of 2021. However, there was no impact on the shekel by the $21 billion investment in foreign exchange, by the central bank, in the previous year.
Amir Yaron, the Governor, had previously appeared to be downplaying the strength of the shekel, inclusive of the interest rate decision that was taken last week. He pointed towards a weak position of the dollar and said that the strength of the shekel has been ‘mostly good’. He further reiterated that the Bank of Israel will make sure to intervene in the market whenever necessary.
In the past few months, the central bank revealed that the foreign currency flows into the economy of the country have increased. This surge has been attributed to the surplus in the current account, direct investments, and large-scale forex sales by institutional investors. These sales have been made against the investment profits of the investors in capital markets abroad. In addition to these three, the intensified forex flows can also be due to a rise in foreign investment in the country’s government bonds.
Abir informed that weeks of discussions took place and after talking down shekel failed, the decision was made to reveal to the market what the intentions of the central bank are. In his opinion, words were not helping their case in the market. Therefore, it was concluded that what they needed was action.
Moreover, the bank will keep an eye on the effects that result from its policy change, over the course of the next few weeks. After that, it will decide whether anything else needs to be done.
Abir further asserted that other policy measures have not yet been ruled out. However, at this time, this is the most appropriate one. He added that even though Israel has been rapidly inoculating its citizens, the economy is battling double-digit unemployment. Consequently, it will take time for the economy to get back up on its feet.
In the Deputy Governor’s opinion, the country does not have time to take any risks where its economy is concerned.