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Cablegate: Bank of Israel Intervenes to Halt Dollar Free Fall

VZCZCXRO5323
RR RUEHROV
DE RUEHTV #0612 0741452
ZNR UUUUU ZZH
R 141452Z MAR 08
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC 5867
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS TEL AVIV 000612

SIPDIS

SIPDIS

NEA/FO FOR DANIN; NEA/IPA FOR SACHAR, GOLDBERGER, SHAMPAINE; EEB/IFD
FOR DIBBLE, GARRY; TREASURY FOR CONNOLLY

E.O. 12958: N/A
TAGS: ECON EFIN PGOV IS
SUBJECT: BANK OF ISRAEL INTERVENES TO HALT DOLLAR FREE FALL


1. (U) On Thursday, March 13, the Bank of Israel (BOI) intervened
in the foreign exchange market to purchase dollars. This is the
first time since June 1997 that the BOI has staged such an
intervention, and followed several pronouncements over the past few
months that it would not interfere in the actions of the free
market, adding the caveat "as long as the market was functioning
properly." However, the dollar's free fall in the last few days
from 3.60 NIS on March 7 to as low as 3.35 NIS on March 13 - the
lowest it has been in ten years, caused BOI Governor Stanley Fischer
to change his mind and intervene. The intervention followed the
market's close at 3.403 on March 13, down from 3.482 on March 12,
3.515 on March 11, and 3.5777 on March 10. On March 14, the BOI
intervened again, causing the dollar to rally and settle at 3.474.
For some additional perspective, the average representative rate was
NIS 4.4878 to the dollar in 2005, NIS 4.4565 in 2006, and NIS 4.1081
in 2007. The shekel-dollar rate stood at 3.846 on December 31,
2007, at 3.625 on January 31, 2008, and at 3.635 on February 29.
2008.

2. (U) The BOI has not commented publicly on its action, except for
issuing a very short March 13 press release, announcing that in
light of the extreme behavior of the shekel exchange rate in the
past few days, it would purchase foreign currency during trading.
The announcement did not indicate the magnitude of the purchase, but
assessments are that the purchases over the last two days ranged
between USD 300 - USD 500 million. Although a rather small amount,
the purchases served the intended purpose of signaling that the BOI
was paying close attention and wanted the dollar decline to stop.
Press reports indicate that the BOI was more concerned with the
continuous free fall nature of the decline than with the particular
level of the shekel-dollar exchange rate. The Tel Aviv Stock
Exchange reacted negatively to the dollar's continued fall, closing
down 3.6 percent on March 13, with the Tech Index going down by 6.1
percent, and the Real Estate Index by 5 percent, although some of
the decline was due to general international stock market weakness.


3. (U) The precipitous fall in the value of the dollar this week
finally compelled the GOI to do what it had been resisting for a
long time - working on an assistance package for exporters who are
being hurt by the strong shekel. Exporters who sell largely to the
U.S. had been trying for months to get the BOI to intervene to halt
the decline of the dollar -- whether by buying dollars or lowering
interest rates - and to convince the government to give them
financial help. The government has now acted in all three areas,
although the 0.5 percent interest rate cut on February 25 did not
halt the dollar's decline. According to press reports, government
representatives met this week with the Israel Manufacturers
Association to start negotiating a deal to aid exporters. While
representatives of the Ministry of Finance and the Ministry of
Industry, Trade, and Labor still refuse to comment on the
negotiations, some reports indicate that the package will involve
financial aid for export promotion and government guaranteed bank
loans for exporters.


JONES

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