Strong Shekel Forced Record Levels of Central Bank Intervention

Commercial and residential property stands beyond Dizengoff Square in Tel Aviv, Israel, on Friday, Jan. 3, 2020. Israel's economy grew an estimated 3.3% in 2019, beating the central bank's forecast, with public and private consumption leading the expansion. Photographer: Kobi Wolf/Bloomberg
Commercial and residential property stands beyond Dizengoff Square in Tel Aviv, Israel, on Friday, Jan. 3, 2020. Israel's economy grew an estimated 3.3% in 2019, beating the central bank's forecast, with public and private consumption leading the expansion. Photographer: Kobi Wolf/Bloomberg

(Bloomberg) -- The Bank of Israel bought $4.4 billion dollars in foreign currency during December, the most in one month since at least 2009, in a bid to slow the appreciation of the shekel.

Despite the outsized purchases, which brought total central bank intervention in 2020 to $21.2 billion, the shekel strengthened 7.5% last year against the dollar -- the sixth-most among a basket of 31 major currencies tracked by Bloomberg. Central bank Governor Amir Yaron said foreign-exchange purchases will continue as necessary this year.

Key Insights

  • The fresh round of currency purchases brought Israel’s total reserves to a record $173.3 billion, or 43.3% of output, and Yaron has said the level of reserves won’t limit the current policy
  • Israel’s currency is seen driven by factors including the current-account surplus and foreign investment in the tech sector
  • Earlier this week, the shekel reached a 24-year high against the dollar, as the outlook for economic growth in 2021 rises on the back of Israel’s world-leading vaccination campaign
  • Monetary policy officials have cautioned the strong currency could act as a drag on inflation and exports, but Yaron said this week that service exports have been notably good during the current crisis, and recently there has been a recovery in goods exports as well

Market Reaction

  • The shekel was trading little changed Thursday afternoon in Tel Aviv, at about 3.18 per dollar

Get More

  • For an explanation of the shekel’s strengthening trend, and why the Bank of Israel has had difficulty slowing its appreciation, check out this question-and-answer.