On Monday, the Bank of Israel said it will sell up to $30 billion of foreign currency in the open market, in the central bank’s first-ever sale of foreign exchange, to maintain stability during Israel’s war with Palestinian militants in Gaza. The move quickly calmed the market as the shekel recovered from steep early losses.
The shekel had fallen to a seven-year low against the dollar before the central bank’s announcement. The Bank of Israel said it will continue to monitor developments, tracking all markets and acting with “all the tools at our disposal.”
Amid an intense military operation in Gaza that has already killed hundreds of Palestinians, Israeli Prime Minister Benjamin Netanyahu warned residents of the coastal strip to get out as he launched a new wave of airstrikes to regain control over territory held by Hamas militants. Israeli military commanders said the IDF had retaken most areas of the territory breached by militants on Saturday. But they warned that there may be more attacks and called up reservists to help secure the rest of the region.
As a result of the fighting and heightened uncertainty in the Middle East, investment in the local economy could dry up. Inflows of international money may also slow, which could dent the stability of the shekel. “The Bank of Israel is committed to ensuring the proper functioning of the financial system in a time of emergency,” Governor Amir Yaron said in a statement.
In recent years, the central bank has regularly intervened in the foreign exchange market to prevent the shekel from appreciating too much and safeguard exporters. It has accumulated forex reserves of over $200 billion. According to a report by Bank Hapoalim Ltd, the bank is expected to sell some of these funds in the coming months to reduce its foreign exchange holdings.
The decision to sell forex is the latest sign of the central bank’s growing concern that the shekel could rise too steeply and hurt the economy as businesses struggle with coronavirus lockdowns. A higher shekel would push up prices for imported goods, harming local manufacturers and leading to increased inflation.
It is the first time the Bank of Israel has sold a portion of its forex reserves since it allowed the shekel to trade freely in 2018. The central bank said that the move is designed to ensure that the market can function adequately as Israeli businesses struggle with coronavirus lockdowns.
In addition to selling foreign currency, the Bank of Israel has also agreed to provide liquidity through swap mechanisms worth up to $15 billion. It added that the central bank will continue to operate in the market during the coming period to moderate volatility in the shekel exchange rate and provide the necessary liquidity.
The shekel is trading at 3.199 shekels to the dollar, a loss of 1.7%, in inter-bank trading. It was down 2.7% before the central bank’s announcement.
