Shekel Ha'Melech Europa, Chai, Chai ..

The smart guys at Bloomberg Business have tried to explain in layman's language why the New Israeli Shekel has become such a consistently strong currency.

This might be why it cost  £20.00 more than expected this past week to transfer money from my Barclays off-shore account to Bank Leumi. But I still don't understand why the cost of living in Israel is generally so much dearer than in central Europe while wages are often commensurately so much lower. Now read on:

May 6 (Bloomberg) -- The Israeli shekel is bucking this year’s sell-off among currencies in the Middle East and Europe and Bank Leumi Le-Israel Ltd. says the currency will keep rising as economic growth picks up and interest rates increase.

The shekel is the only currency to rise against the dollar this year among the 10-most active currencies in emerging Europe, the Middle East and Africa. The central bank forecast economic growth of 3.7 percent in 2010, buoyed by exports, even as policy makers raise borrowings costs to stem inflation. Hungary’s forint tumbled 15 percent and the Polish zloty slumped 12 percent as Greece’s financial crisis threatens to slow growth in Europe and reduces the nations’ prospects to adopt the euro.

“The shekel is king,” said Lior Faust, foreign banks and hedge funds relationship manager at Bank Leumi in Tel Aviv, the country’s largest bank by assets. “There’s positive outlook for Israeli rates, strong growth and a healthy trade balance. Israel is not related to the euro zone’s problems with Greece, Spain and Portugal, so why should you sell the shekel?”

The shekel has extended gains as Bank of Israel Governor Stanley Fischer, who began buying foreign currency in March 2008, pledged in August to stave off the rally to protect exporters and fuel growth. The country must remain alert to the possibility of fallout from Europe’s debt crisis and exports would be one of the first areas to be influenced, Fischer said yesterday.

Capping Gains

“If the euro area, the destination for one third of Israel’s exports, problems heighten, one could envisage the Bank of Israel becoming more aggressive in preventing the shekel from strengthening,” Koon Chow, an emerging-market currency strategist at Barclays Capital in London, said in an interview.

Reserves rose to a record $64.5 billion in April, the central bank said today. The Bank of Israel said last October it will “follow closely developments” in the foreign-exchange market and has taken “exceptional” intervention measures to shield growth, employment and stability.

Fischer, who helped steer the economy back to growth by lowering rates eight times starting in October 2008 amid the worst global recession since World War II, said in March a key challenge is to bring the economy back to 5 percent expansion. On May 2, he called that target “ambitious.”

World Trade

The economy may grow as much as 4.3 percent this year, after expanding 0.7 percent in 2009, if the global recovery is sustained, Finance Minister Yuval Steinitz said today. The benchmark stock index surged to a record high on April 6, buoyed by economic growth.

The nation’s current-account surplus will widen as it “benefits from the recovery in world trade,” said London-based Paolo Batori, head strategist for Central and Eastern Europe, Middle East and Africa at Morgan Stanley. The surplus more than tripled to $7.2 billion in 2009, according to data from the Central Bureau of Statistics. Exports account for about half of gross domestic product.

This year, advanced economies including the U.S., Germany and Japan will grow 2.3 percent, more than the 2.1 percent forecast in January, the International Monetary Fund said in April. The euro area is likely to expand 1 percent this year, unchanged from the January projection, according to the IMF.

‘Most Stable’

“If you look at the figures, Israel’s economy is one of the most stable in the world, the stock market was among the first to break a pre-crisis record,” said Tel Aviv-based Tal Zohar Avda, chief executive officer at Forex Capital Markets LLC’s Israel unit.

Policy makers in China, India, Vietnam and Israel have increased interest rates amid signs that accelerating growth is fuelling inflation and increasing the risk of asset bubbles. The Bank of Israel raised its benchmark lending rate four times since August to 1.5 percent, compared with near zero rates in the U.S.

Israeli policy makers are in the process of bringing the rate back to a more “normal” level, the bank said April 26. The monetary authority may increase the rate to 2.75 percent by the end of the year, according to Aksoy, a London-based economist at Morgan Stanley.

Swaps

“Rates should rise in order to allay concerns on inflation once again trending higher during a period when the economy is growing faster than initially expected,” Aksoy said.

Interest-rate swaps show investors are betting the central bank will lift borrowing costs. The one-year interest-rate swap, the fixed cost needed to receive a floating payment, was 2.25 percent, reflecting traders’ estimates for rates in the coming 12 months.

Inflation in March slowed to 3.2 percent from 3.6 percent the previous month, remaining above the government’s target range of 1 percent to 3 percent for a fifth month.

Um, err, so now we know ...

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