The dollar exchange rate soared this evening due to market expectations Bank of Israel governor David Klein will cut key lending rates by as much as 2% as part of the economic package deal. Foreign exchange trading rooms reported deals at a rate of NIS 4.33 ¿ 1.35% above the representative exchange rate set this afternoon at NIS 4.272 and six agorot above yesterday¿s representative rate.
In a press conference scheduled for Sunday, Klein and Minister of Finance Silvan Shalom will announce the rate cut, after the ministry agreed to Klein's terms. Klein agreed to make the cut subject to changes in foreign exchange policy. The Ministry of Finance will announce at the press conference that the lower limit of the fluctuation band will be steady at NIS 4.10. This effectively limits shekel revaluation against the basket of currencies to that level.
The ministry also agreed to Klein's demands to further liberalize markets and remove limitations on trade in short-term debt.
The ten agorot jump since the beginning of the week brings the exchange rate back to the levels it last hit after the September 11 attacks on the U.S.
One currency trader told TheMarker today that after the 8:00 pm television news, in which the expected rate cut was announced, "market players just gobbled up dollars. Foreign investors also expressed a great deal of interest, many purchasing dollars on expectations of further shekel devaluation." Klein said in the newscast that he would reduce interest rates as part of an economic package deal, but he did not say by how much. Morning estimates had been that he would cut rates by 1% and reports of a deeper reduction, possibly even double the early assumptions, brought on sharp shekel devaluation at the end of trading today.
Traders also believe the Argentinean crisis is affecting the market, as foreign investors buy dollars despite their usual aversion to year-end positions.
It is worth noting that Citibank recommended buying dollars a month ago, estimating that the shekel was overvalued by 20%. Citibank predicted that economic data would eventually lead to shekel devaluation ¿ the phenomenon we are seeing now.