Shekel resists as Israel defies crisis

Bloomberg

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Leah and Dov Yaakoby got a surprise wedding gift when their landlord offered a month's free rent to renew the lease on an apartment in the suburbs of Haifa in northern Israel.

The catch was they would have to start paying rent set in shekels, not dollars. The landlord wanted the change because the shekel's 30 percent appreciation since October 2005 meant the $525 monthly payment, valued at 2,426 shekels when they moved in, was worth 1,844 shekels by their wedding day in March.

"He ended up owing us money," said Leah, a 27-year-old writer of online software guides. "Getting a one-month break on the rent was really great."

The shekel increasingly looks like a hard currency. Since Stanley Fischer, the former International Monetary Fund deputy director, became the Bank of Israel governor in May 2005, the shekel strengthened 12 percent against the dollar and the Swiss franc, 13 percent versus the euro, 3.1 percent against the yen and 41 percent compared with the British pound.

A safe asset
"The shekel is the safest asset in Europe, the Middle East and Africa," Merrill Lynch strategist Benoit Anne in London wrote in an Oct. 22 report. "The shekel presents some defensive characteristics, which has served the currency relatively well at a time of several global risk conditions."

Merrill set its ’medium-term’ fair value for the shekel at 3.37 to the dollar. The shekel traded at 3.92 on Nov. 17. Merrill's prediction would amount to 16 percent gain in the next two to three years.

Investors are gaining confidence after Israel's economy grew an average of 6 percent in the past four years and inflation slowed to an annualized rate of 5.5 percent last month from as high as 486 percent in November 1984. Israel's $206 billion economy will expand 4.5 percent in 2008, according to Central Bureau of Statistics estimates.

That's faster than the 3.7 percent forecast for the world economy by the IMF. U.S. gross domestic product contracted at a 0.3 percent rate last quarter, the biggest decline since 2001.


Better than neighbors
Israel's economy is holding up better than other Middle Eastern nations. Dubai may need support from its neighboring emirates to finance borrowing that paid for development of the world's tallest building, created palm tree-shaped islands and bought stakes in banks, Moody's Investors Service said in an Oct. 13 report.

Kuwait had to prop up its banking system as the end of the oil boom weighed on the region's stock and real estate markets. The Kuwait Stock Exchange suspended trading Nov. 13 and the United Arab Emirates said in October it would guarantee deposits of all local banks and large foreign banks.

Israel avoided the worst of the damage from the credit crunch. The central bank said last month there was "no sign" of a domestic cash squeeze, with lending among financial institutions taking place "as usual."

Fischer, 65, lowered the Bank of Israel's main interest rate to 3 percent from a high this year of 4.25 percent, including an unscheduled cut of half a percentage point Nov. 11. Jonathan Katz, a Jerusalem-based economist for HSBC, called the latest reduction an effort "to get ahead of the curve."

Fischer, the former Citigroup vice chairman, helped to steer the economy as the sudden increase in borrowing costs battered biggest financial companies. The IMF warned Nov. 6 that the U.S., Europe and Japan are headed for the first simultaneous recessions since World War II.

The shekel also benefited as Israelis who invested overseas brought money home. They were net sellers of 396 million shekels ($101 million) of foreign securities in the first nine months of the year, after investing about 4 billion shekels abroad in 2007.

"The shekel has held up well," said Neil Corney, the treasurer at the Tel Aviv unit of Citigroup, the world's fourth-biggest foreign-exchange trader, which advises investors to add the shekel to their holdings. "There's a lot of repatriation of funds back to Israel and investors have used the shekel as a hedge against other currencies as growth is higher than in other nations."