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Bank of Israel
Foreign Currency Department
Economic Unit
Foreign Currency Exchange Rates
In Israel
1998
Jerusalem, January 1999
Information on representative rates may be obtained by:
Telephone –
For the current day’s rates of main currencies, call:
02–6552999 or 03–5601214
For general information, call: 02–6552321
Also available:
A PC diskette with the daily representative rates and monthly averages from 31.10.77
to 31.12.98 and the boundaries of the exchange-rate band from 03.01.89 to 31.12.99.
Printed information –
An annual subscription to the weekly data sheet of representative rates.
For details, contact the Bank of Israel, Publications Unit:
Tel. 02–6552767, Fax. 02–6552984 or P.O.B. 780, Jerusalem 91007.
Separate information on representative rates and average exchange rates is contained in the
following publications:
Foreign Currency Exchange Rates in Israel, 1948–1985,
Foreign Currency Exchange Rates in Israel, for each year from 1986 to 1997.
© Bank of Israel
Passages may be cited provided source is specified
Contents
C.Exchange rates developments in Israel and explanatory notes - A WORD file (in ZIP format)
Exchange rates (1) In the first quarter of the year, the exchange rate of the NIS against the currency basket (Appendix 2) hovered very close to the lower limit of the exchange-rate band (Appendix 3). At the beginning of April there was strong demand for foreign currency, mainly due to uncertainty regarding the details and implications of the liberalization program in the foreign-currency market. The details were due to be announced just before Israel's 50th Independence Day (April 30, 1998). By April 14, the NIS had depreciated to a rate about 4.2 percent above the lower limit of the band, having been traded at the lower limit of the band at the end of March. In the next two weeks the exchange rate continued to fluctuate in a narrow range, and the NIS moved between 3.25 percent and 4.25 percent above the lower limit. With the publication of the details of the liberalization program on April 28, foreign currency was well offered in the market, and the NIS strengthened to 1.75 percent above the lower limit of the band on May 15. The NIS continued to strengthen over the following two months, and from July until the second half of August it was traded between 0.5 and 1.0 percent above the lower limit of the band. (See Diagrams 1 and 2.) On August 6, the Bank of Israel and the Ministry of Finance announced two economic measures. One was setting the inflation target for 1999 at 4 percent (versus 7-10 percent in 1998). The other was a change in the parameters of the crawling exchange-rate band, with the slope of the lower limit of the band being reduced from 4 percent to 2 percent. The slope of the upper limit, 6 percent, has not changed for several years. Therefore, it is only the slope of the lower limit which reflects the difference between the inflation target in Israel and expected inflation abroad. The purpose of the change was to help attain the 1999 inflation target, in light of the proximity of the NIS/currency-basket exchange rate to the lower limit of the band. Having evidence of the Government's determination to lower inflation, as reflected in the above steps, the Bank of Israel decided to reduce interest rates by 1.5 percentage points, which it announced on the same day, on August 6. This reduction was in line with the policy of gradually lowering interest rates which the Bank had followed during the year, and which brought the total reduction since the beginning of 1998 to 3.9 percentage points. On the day of these announcements, which took the market by surprise, the NIS depreciated by 1.5 percent. The next day it reverted to a level about 1 percent above the lower limit of the band, remaining at that level till the middle of August. In the second half of August the global financial crisis, which had started in 1997 in South East Asia, became more acute. Having spread to commodities-exporting countries (such as Russia and Latin America) in May, the crisis reached a peak in August following Russia's declaration of a moratorium on its debt repayments. International investors, feeling growing concern over the possibility that their capital might not be repaid, intensified their withdrawal of capital from emerging markets and from relatively high-risk assets. The market in Israel did not escape this phenomenon. Demand for foreign exchange increased, and by September 11 the exchange rate against the currency basket had risen to NIS 4.1968 (6.8 percent above the lower limit of the band), and to NIS 3.860 against the dollar. In the second half of September, as the markets became calmer for a while, the exchange rate of the NIS stabilized, and was traded at 6.5 percent above the lower boundary of the band (at about NIS 4.18 against the currency basket, and NIS 3.85 against the dollar). At the end of September, it became known that a large US based hedge fund, Long Term Capital Management (LTCM), had suffered great losses as a result of its activities in international bond markets, particularly in emerging markets, via derivatives and use of a high rate of leverage. In order to prevent panic and a collapse of financial markets world wide, the United States Federal Reserve Bank took the exceptional step of organizing a group of investment banks and commercial banks - the fund's creditors - to support the fund while bringing about its orderly closure. As a result of the LTCM episode, stock markets in the advanced economies fell, followed by bond markets. This led to a turnaround in trading in the domestic foreign-currency market at the beginning of October. Demand for foreign currency rose, reflecting an attempt by the private-sector to reduce its exposure to foreign currency and, apparently also, an increase in demand for foreign currency from foreign parties. The exchange rate of the NIS began to rise, and by October 22 had reached a level 19.8 percent above the lower limit (NIS 4.8023 against the currency basket, and NIS 4.3670 against the dollar). The rise in the exchange rate dragged in its wake a rise in prices as well as in inflation expectations. In order to halt this phenomenon, the Bank of Israel raised the interest rate by 4 percentage points - 2 percentage points at the end of October and another 2 percentage points in the middle of November. These steps, along with a calmer atmosphere in the major international markets, led to a degree of stabilization in the domestic foreign-currency market and to a reduction in inflation expectations. In November, the NIS fluctuated between 13.5 and 14.5 percent above the lower boundary of the band. In December, several important political/economic events, domestic and external, occurred that could have been expected to cause shocks in the foreign-exchange market. The major ones were bringing forward the General Election, and the attack on Iraq. Nevertheless, there was no sharp devaluation of the NIS, which traded at between 14 and 15 percent above the lower limit of the band until the end of the year. The public's confidence in the Bank of Israel's obligation and determination to achieve market stability apparently contributed to this. Another factor which contributed to the calm was the overall unwillingness of market participants to open positions towards the end of the year. The factors which affected exchange-rate developments during the year also had an effect on its volatility(2). In January - March, the volatility of the NIS against the currency basket remained fairly low - between 2 percent and 5 percent; in April it began to rise, reaching 11.4 percent in the middle of May; from then till August the exchange rate became less volatile. From August 6 volatility rose again, reaching a peak of 30.1 percent at the beginning of November, its highest level since the new trading regime came into operation in 1995. With the calm which prevailed in the market at the end of November and in December, volatility declined considerably, falling to 3.6 percent by the end of the year. (See Diagram 3.) Intra-day volatility, defined as the spread between the highest and the lowest exchange rates in trading each day, was low and steady until the end of August, hardly exceeding one agora during that period. From the end of August the spread widened, reaching between 3 and 9 agorot on several days, and on one day in October going as high as 16 agorot. The market became calmer at the end of November, and the daily spread was about one and a half agorot. As a result of reduced volatility in December, the spread narrowed further, to between one-half and one agora. (See Diagram 4.) With the exception of 6 days surrounding the end of 1997, when the Bank of Israel purchased foreign currency to prevent the exchange rate against the currency basket from sliding below the lower limit of the band, the Bank has not intervened in the market since the second half of 1997. Turnover in the NIS/$ market The volume of banks' trade with customers rose steeply in 1998: average daily activity including swaps reached $555 million compared with $ 357 million in 1997, and excluding swaps, $368 million compared with $ 278 million in 1997. In October the daily average volume of trade reached a new monthly peak of $ 968 million including swaps, and $ 525 million excluding swaps. (In October, the rate of depreciation against the currency basket and the dollar also reached a peak.) The volume of interbank trade rose to an average daily level of $114 million from $ 83 million in 1997. The main reason for the increase, especially that in trade with customers, was the progress made in liberalizing foreign currency, a process which almost reached completion in May. The regime of foreign-exchange control changed: since May 14, 1998, all activities or transactions in foreign exchange have been permitted, except for a short list of those still restricted, including certain activities by institutional investors and some forward transactions by nonresidents. The rise in the volatility of the exchange rate since August, which raised demand for foreign currency, also served to increase the volume of activity. Since November 1996, a currency broker has been active in the market, serving as an intermediary in transactions between banks, and between them and the Bank of Israel. The broker fulfills an important role in interbank trading, and serves to increase competition between the banks. This is reflected inter alia by the reduction in the spread between purchase and sale prices in interbank trading. This margin is usually about 0.4 agorot, but in periods of uncertainty, such as prevailed in September and October 1998, it has increased to about 2 agorot. The margins quoted by the banks on Reuters screens are generally greater than those at which transactions are actually performed; actual margins in the market are closer to those quoted by the broker. At the end of November a foreign bank began to publish rates on the Reuters screen and has demonstrated a willingness to quote rates at which it will perform transactions in the interbank market. This had the immediate effect of reducing the domestic banks' margins, as published on the Reuters screens, to less than 1 agora. By contrast, margins quoted in the market did not alter, remaining at about 0.4 agorot. The increase of foreign banks' activity in Israel evident in 1997, on their own behalf and for their customers, continued in 1998. This development was the result of the process of liberalization, which removed most restrictions on trade in NIS. Nevertheless, the bulk of trade is still carried out in Tel Aviv, by the domestic banks.
Representative Rates (3)
Representative rates give the exchange rates of foreign currencies and the currency basket in terms of NIS. The representative rate of any currency is an indicator of the exchange rate prevailing in the market(4); it is based on an average of buying and selling prices published by banks, and does not necessarily reflect rates at which transactions were carried out. The rates have no official validity, are not legally binding, and are not published in the Official Gazette. They are used mainly for valuations and in contracts. Parties to a foreign-currency linked business transaction may carry out the transaction at any exchange rate agreed between them. The representative rate is binding for such a transaction only if explicitly stipulated in advance by the parties. Several other Western countries, which have two-sided foreign-currency trading systems, also publish representative exchange rates. The United States Federal Reserve Bank publishes the mid-rate of interbank trade in New York twice a day. The rate appears on Reuters screen 1FED. The Bank of England publishes a mid-rate, based on its own calculations, daily, at 11:00 a.m., on Reuters screen BOE/SAF. The Bank of Israel calculates representative exchange rates once a day on foreign-currency business days only, and makes them available to the general public as a purely informational service. There are no representative rates on Saturdays, Sundays, Israeli holidays, Christmas Day, New Year and Easter, when foreign-exchange markets are closed in most countries(5). There may, of course, be other occasions when representative rates cannot be published owing to lack of data or because there has been no trade in foreign currency, or for other reasons. Information on the new rates of exchange are normally available in the afternoon (see below). The time is not fixed, however, and the rates may be calculated and made available to the public at other times. It is therefore advisable for the parties to a transaction linked to the representative rate to stipulate in advance what the relevant rate is to be: for example, the one published on the date of the transaction, the latest published rate before the date on which transaction is carried out, or the rate published on a certain date before or after the date of the transaction. Until May 23, 1990, the representative rate of the US dollar on a certain date was calculated as the average of the commercial banks' quoted buying and selling rates (transfers and checks) as reported by the banks to the Bank of Israel. As of May 24, 1990, when electronic trading in US dollars against NIS between the Bank of Israel and the authorized dealer banks was introduced, and until multilateral trading was canceled, the representative rate for a given day was the rate at which daily trading closed. Multilateral trading between the banks and the Bank of Israel came to an end on April 3, 1995, and all trading has henceforth been on a continuous two-sided basis(6). The system of determining the representative rate was adjusted at the same time, and the representative rate of the NIS against the US dollar for a specific day is the average rate of two-sided interbank trading close to the end of trading hours in NIS, as determined by the Supervisor of Banks. The average rate is calculated on the basis of a sampling of exchange rates published by the banks on the Reuters screens, taken at a random moment between 14.15 and 15.15 (or between 11.15 and 12.15 on Fridays and holiday eves). The representative exchange rate is published at 15.15 (or at 12.15 on Fridays and holiday eves). The representative rate is calculated from the average of the banks sampled, and excludes values which deviate from the sample average by more than two standard deviations. In exceptional cases, in which the calculated exchange rate does not reflect actual rates prevailing in the market, discretion may be exercised in determining the representative rate. The representative rates of the NIS against other currencies are based on the representative rate of the US dollar and the exchange rates of the relevant currencies against the US dollar on the international money markets at the moment the representative rate is determined. Consequently, the relationship between the various representative rates reflects the relationship between spot exchange rates abroad at the time they are determined. On January 4, 1999, with the introduction of the Euro currency in the European Monetary Union (EMU), the Bank of Israel began to publish a representative exchange rate against the Euro instead of against the ECU (European Currency Unit). The Bank also continues to publish exchange rates against the currencies of the EMU member countries(7).
The currency basket was introduced on July 19, 1976. The composition of the basket was based on the shares of five currencies - US dollar, German mark, Pound sterling, French franc, and Dutch guilder - in some of Israel's goods exports. At that time creeping devaluations of the Israeli pound against the currency basket were carried out. The regime of the exchange rate against the basket continued until the end of October 1977, when it was changed to a floating exchange-rate against the US dollar. In July 1985, with the start of the economic stabilization program, a regime of a fixed exchange rate against the US dollar was introduced. A new currency basket was introduced on August 1, 1986. The currencies comprising it and their weights reflect their share in Israel's foreign trade of goods and services (imports and exports, excluding diamonds). Exchange-rate policy since the introduction of the basket has been based on setting the rate of the NIS against it and not against the US dollar. The number of units of each currency in the basket is determined according to its share in trade during the previous calendar year and to international cross rates at the time the basket's composition is being fixed. The number of each currency unit in the basket is constant, but the weight of each currency can change daily according to changes in cross rates. For example, when the US dollar gains strength, its share in the basket rises, and vice versa. Since the original composition of the basket was determined, the Bank of Israel has periodically checked the composition of trade in the previous calendar year, and compared it to the average composition of the basket in the same period. Until the beginning of 1995 only slight differences between the two were found, so that the composition of the basket was not changed till then, other than the continuous daily changes in weights arising from changes in cross rates. The review carried out in 1995, based on trade figures for 1994, revealed that the weight of the US dollar in the basket was 3.2 percentage points lower than its share in foreign trade. It was therefore decided on June 5, 1995 to increase the US dollar's weight in the basket by a similar amount, with corresponding reductions in the weights of the other currencies in the basket. In discussions between the Ministry of Finance and the Bank of Israel it was decided that each year the final trade figures for the previous year would be reviewed, and if this showed a difference of two percentage points or more between a currency's weight in the basket and its share of trade, the composition of the basket would be amended accordingly. Following the above decision, on April 30, 1996 the weight of the dollar was increased by 3.3 percentage points, and those of the other currencies reduced accordingly. The review of the 1996 trade figures carried out in April 1997 showed no significant differences between the compositions of the basket and of the trade, so that no changes were made to the number of currency units in the basket for 1997. A similar review undertaken in April 1998 (i.e., of trade in 1997) showed that again the composition of the different currencies making up the basket had not changed. On January 4, 1999, due to the introduction of the Euro currency in the European Monetary Union, a change was made to the composition of the currency basket. The Euro replaced the German mark and the French franc. This change was purely technical and had no effect on the value of the currency basket. It was not connected to a routine adjustment of the currency basket, which is carried out, as necessary, on April 30.
Table 1: Weight of currencies in the basket (in percent)
Table 2: Units of each currency in basket
The Exchange-Rate Band
On January 3, 1989 the Bank of Israel changed the policy regarding the determination of the exchange rate against the currency basket. Instead of an exchange rate held constant over a period of time, and adjusted from time to time, the rate was allowed to fluctuate within a band with limits 3 percent above and below the midpoint rate. The fluctuation span around the midpoint allowed expression to supply and demand for foreign exchange as well as monetary policy considerations. Every few months the midpoint was adjusted (devaluation). On March 1, 1990 the limits were extended to ±5 percent. On December 17, 1991 another change was introduced to the regime. Under the new system, there is gradual, constant, and predetermined adjustment to both the midpoint and the band. The midpoint rises daily at a fixed rate, so that its cumulative annual rise is constant and known in advance (as are those of the upper and lower limits of the band). The band slopes upwards— hence it is known as the crawling band. The width of the band remained at ±5 percent until May 31, 1995, when it was extended to ±7 percent. On June 18, 1997 the band was widened to ±15 percent. The purpose of the crawling band was to indicate a predetermined path for the development of the exchange rate, and thereby to reduce economic uncertainty. The system was also intended to lower the probability of speculative capital flows, which had occurred in the past whenever there were expectations of a relatively large one-time realignment of the horizontal band. Such adjustments were made from time to time on account of the difference between the rate of inflation in Israel and those in Israel’s trading partners. These adjustments were accompanied by severe fluctuations in interest rates. The slope of the band is derived from the difference between Israel’s inflation target for the following year as set by the government, and predicted inflation abroad. In the last few years, however, only the lower limit of the band has been adjusted according to this rule, while the upper limit has remained unchanged. As a result, the band is gradually becoming wider.
Changes in the Exchange-Rate Band of the Currency Basket
(2) Upper and lower rates of the band. Since 18.06.97, exchange-rate policy relates to the limits of the exchange-rate band, and not to the midpoint, which is now used for statistical purposes only.
Foreign-exchange policy 1948 - 1988
Israel’s currency was changed from the Israeli pound to the sheqel in 1980, and from the sheqel to the new sheqel (NIS) in 1985. One sheqel was equal to ten pounds, and one new sheqel to 1,000 sheqalim. The sheqel entered circulation on February 24, 1980, and from September 30, 1980 prices and exchange rates were quoted in sheqalim; from March 31, 1984 the pound ceased to be legal tender. The new sheqel went into circulation on September 4, 1985 and since January 1, 1986 prices and exchange rates have been quoted in new sheqalim; on September 4, 1986 the sheqel ceased to be legal tender. After the establishment of the State of Israel its currency continued to be linked to the pound sterling, as it had been during the British Mandate, but in practice exchange rates were also quoted in US dollars. From January 1954 the new official rate of the Israeli pound was quoted in US dollars and not in pounds sterling. From the establishment of the State until October 1977 exchange rates were official. Until August 1975 the rate was constant, with a devaluation occurring only once in several years. From August 1975 to October 1977 there were more frequent devaluations (“creeping devaluation”). At the beginning of this period the Israeli pound was still linked to the US dollars, but from July 1976 to October 1977 it was linked to a basket of five currencies. Since the start of currency liberalization in October 1977, there have been no legally binding exchange rates in foreign-currency transactions. Representative exchange rates of foreign currencies are published daily by the Bank of Israel (see Appendix 1). With the introduction of the economic stabilization program in July 1985, the regime became a fixed exchange rate against the US dollar, and from August 1, 1986 against a new currency basket (see Appendix 2). In this regime the stable level of the exchange rate was adjusted from time to time. On January 3, 1989, the Bank of Israel changed its policy regarding the determination of the exchange rate against the currency basket (see Appendix 3). See Appendix Table 1 on the following page for details of changes in the US dollar and currency-basket exchange rates. A. Until October 1977 - official rates(1)
B. October 1977 - January 1989, Representative Rates(3)
(1) The exchange rates in Part A of the table are official rates, i.e., rates officially declared by the government. In addition to these, formal exchange rates are given for the period to 10.2.62; these rates applied to direct foreign-currency transactions and were binding. (On the difference between official and formal exchange rates see Michael Michaely, Israeli Exchange-Rate System, Jerusalem, Falk Institute, 1968.) (2) The change in the Israeli pound/dollar rate in September 1949 was derived from the reduction of the pound sterling - from £ 0.250 to £ 0.357 to the dollar. *With one-time adjustments. (3) The representative rate, calculated by the Bank of Israel from October 1977, was intended to reflect rates in the foreign-currency market, and was not an official rate. (4) At these times the devaluation was spread over several days. The figures shown are the total devaluations during the periods in question. (5) On this date a new 5-currency basket was introduced (see Appendix 2). (6) For data relating to the period after this date, see table in Appendix 3. SOURCE: 15.05.1948 - 19.11.1967: Central Bureau of Statistics; 22.08.1971 - 17.10.1977: The Official Gazette 31.10.1977 - 03.01.1989: Bank of Israel circulars. * With one-time adjustments.
EXCEL files (in ZIP format)
Each file includes representative rates of 24 currencies, including currency basket for 5 years.
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