"There is a strategic problem with Israel's exchange rate. There will be no choice but to join the euro (abolish the shekel - I.A.), or link the exchange to the euro," says a senior banker.
The banker believes that attempts to solve the volatility in shekel exchange rates, including by dollar purchases by the Bank of Israel, are futile. "The present method of buying dollars, or seeking alternative solutions, only go round and round. We're trying to fix a strategic problem with tactical means, and it doesn’t work. It's impossible to manage a free exchange rate policy in Israel."
The banker says that the exchange rate is critical for Israel, because foreign trade is significant for local industry. "Each one percent fluctuation in the exchange rate causes shocks to industry, which cannot cope with this all the time," he added.
Linking the shekel to the euro means that for each shekel in circulation, there must be a fixed amount of euros in reserve. Linkage would solve the problem of volatility for Israeli exports to Europe, but won't help exporters who use dollars. The dollar weakened by about 30% against the euro during the last crisis.
Linking the shekel to a foreign currency would also critically affect Israel's monetary policy. Any change in the interest rate would strongly depend on the euro interest rate, so that even if Israel desperately needed an interest rate cut, but the euro rate was kept unchanged, the Bank of Israel would find it very difficult to cut its interest rate.
The banker's comments come after a long period of sharp volatility in the shekel-dollar exchange rate. In April, the shekel-dollar exchange rate reached NIS 4.28/$, but has since fallen 12% to NIS 3.76/$.
Published by Globes [online], Israel business news - www.globes-online.com - on September 7, 2009
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