The Currency Basket
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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 Israel's goods exports. At that time creeping devaluations of the Israeli pound against the currency basket were carried out. This regime continued until the end of October 1977, when it was changed to a managed float of the exchange rate.
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 (see Table 1) reflect their share in Israel's foreign trade of goods and services (imports and exports, excluding diamonds). From the inception of the basket until 8 June 2005, the parameters of the exchange-rate regime (the exchange-rate band) have been set in terms of the basket rather than in terms of a specific currency. The exchange rate band was abolished on 9 June 2005. The Bank of Israel continued to publish a currency-basket exchange rate for purely statistical purposes until 30 April 2007.
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 fixed. The number of units of each currency 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 these 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 trade figures carried out in April 1997, April 1998 and April 1999 (i.e., of trade in 1996, 1997, and 1998) 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 these years. In a similar review undertaken in April 2000, the share of the pound sterling in the currency basket was reduced by 2.1 percentage points. The weights of the other currencies were adjusted accordingly. Based on the reviews of trade in 2000, 2001, 2002 and 2004, the composition of the basket did not change in April 2001, 2002, 2003 and 2005. The review of the 2003 and 2005 trade figures led to changes in the composition of the basket in April 2004 and April 2006.
On January 4, 1999, due to the introduction of the euro 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.
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Table
1: Weight of currencies in the basket (in percent)
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Currency basket
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Date
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US dollar
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German Mark
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Pound sterling
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French franc
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Japanese yen
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Euro
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| When determining composition
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1986
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01.08.86
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60.0
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20.0
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10.0
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5.0
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5.0
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1995
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05.06.95
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54.8
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24.2
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8.3
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5.6
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7.1
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1996
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30.04.96
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60.3
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21.0
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8.0
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5.1
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5.6
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2000
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02.05.00
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64.8
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6.8
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6.4
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22.0
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2004 |
30.04.04 |
64.5 |
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5.9 |
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5.6 |
23.9 |
2005 |
01.05.06 |
65.7 |
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5.7 |
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5.7 |
22.9 |
| At year end
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31.12.96
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60.3
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20.7
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9.0
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5.0
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5.0
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31.12.97
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63.0
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18.7
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9.1
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4.6
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4.7
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31.12.98
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62.0
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19.7
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8.2
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4.8
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5.3
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31.12.99
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63.4
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-
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9.0
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-
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6.0
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21.6
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31.12.00
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64.9
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-
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6.5
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-
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6.1
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22.5
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31.12.01
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66.2
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-
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6.5
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-
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5.5
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21.8
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31.12.02
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62.9
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-
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6.9
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-
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5.7
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24.5
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31.12.03
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59.1
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-
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7.2
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-
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5.9
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27.8
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31.12.04
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61.8
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-
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6.2
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-
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5.8
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26.2
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As pointed out earlier, the relative shares
of currencies in the basket change on every trading day in accordance with
changes in their exchange rates, but the number of units of the currencies
composing the basket remain as shown in Table 2.
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Table 2: Units of each currency in basket
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Currency basket
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US dollar
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German Mark
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Pound sterling
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French franc
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Japanese yen
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Euro
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1986
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0.6000
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0.4177
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0.0670
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0.3394
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7.7000
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1995
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0.6732
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0.3964
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0.0604
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0.3222
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7.0106
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1996
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0.6741
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0.3588
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0.0589
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0.2933
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6.5437
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1996 (euro)a
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0.6741
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-
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0.0589
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-
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6.5437
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0.2282
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2000
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0.6698
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-
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0.0453
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-
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7.2411
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0.2493
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2004 |
0.7185 |
- |
0.0374 |
- |
6.9216 |
0.2228 |
2005 |
0.7412 |
- |
0.0351 |
- |
7.3307 |
0.2053 |
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a Adjustment carried out in
1999 to reflect the introduction of the euro, with no change to the
1996-weights.
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