Israel Currency Discussion Board

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Lovin' the shekel: It isn't just that the dollar is feeble, says Morgan Stanley
25.4.07 | 12:02 By Tal Levy
Get it straight: "The shekel's appreciation is not just about the dollar's weakness," Morgan Stanley begins its review of the local currency, which has appreciated by more than 8% against the greenback in the last 12 months.

Israel's macroeconomic and structural features are more important than the dollar's weakness, though that's a factor too, postulates analyst Serhan Cevik.

"With fiscal normalization and greater specialization in higher value-added sectors, the Israeli economy has enjoyed a marked acceleration in real GDP growth and structural shifts in the balance of payments," he writes.

No wonder the shekel has been powering ahead, to some dismay at the Bank of Israel. The improvement in Israel's current account balance, despite the surge in commodity prices, is the core of Cevik's argument that the shekel is genuinely strong, he explains.

Cevik, who routinely covers Israel for the investment bank, has been noting his high esteem for the shekel for some time. Back in August 2006, he wrote a review about the amazing shekel, writing that it was still trading at a discount of 12.5% against the dollar.

At the time, the shekel-dollar exchange rate was NIS 4.40 and Cevik predicted that it would sink below NIS 4.

This morning as of writing, the dollar is sinking 0.35% against the shekel to NIS 4.054.

The Bank of Israel has been trying to weaken the shekel, in order to boost inflation - which has been negative - back into the realm of price stability. But wielding its only real weapon, interest rate cuts, hasn't worked so far, which Cevik points out that he predicted.

"This approach may not necessarily be effective in the short run," Cevik writes. He believes inflation will be restore to its target range, at some point, because present real GDP growth at 8% in annualized terms in the fourth quarter of 2006, outstripped Israel's actual potential growth rate, which is 4-5%.

http://www.haaretz.com/hasen/spages/852073.html