BOI - Foreign-Currency Exchange Rates in Israel 1999

Exchange rates¹

From the beginning of the year until the end of December, the sheqel (New Israeli Sheqel–NIS)
strengthened against the currency basket by 3.2 percent, and against the dollar by 0.2 percent.
The difference reflects the strengthening of the dollar against most other currencies in world
markets. Following the fluctuations and significant rise of the exchange rate in the last few
months of 1998 which took place against the background of the international financial crisis,
the foreign exchange market was relatively calm in 1999. In the first few months of the year
there was a trend of nominal appreciation of the NIS against the currency basket, with a
contraction of the distance from the lower limit of the exchange-rate band from 14 percent to
7.2 percent². In the last few months of the year the sheqel depreciated against the currency
basket, to a level close to that at the beginning of the year (see Diagrams 1 and2). The band
widened from 31.8 percent at the beginning of the year to 35.5 percent at the end, the result of
the slopes of the upper and lower limits remaining the same as in 1998—6 percent and 2
percent respectively³.
In the first quarter of 1999, the NIS appreciated by 5.5 percent against the currency basket
despite the uncertainty caused by the announcement, at the end of 1998, of early elections for
the Knesset (Israel's parliament) and for Prime Minister. Even the crisis in Brazil in January
1999 did not cause pressure in the domestic foreign currency market. The renewed
strengthening of the NIS may be explained inter alia by the high differential between the
interest rate in Israel and those in other economies, and by expectations of relatively low
differences between their inflation rates. It can also be explained by the calm in foreign
currency and capital markets in emerging economies, which was maintained despite Brazil's
currency crisis, and by buoyant stock markets throughout the world, which gave rise to a
feeling of stability and attracted back to the domestic market foreign investors who had
reduced their activity as the global financial crisis worsened in August–October 1998. The
strength of the sheqel may also be due to a correction of the market's over-reaction to that
crisis. Against this background, and in the light of the reduction in inflation expectations to 5.5
percent in February and March, the Bank of Israel cut the rate of interest on its monetary loans
by 0.5 percentage points towards the end of February, and by another 0.5 percentage points at
the end of March. At the end of the first quarter, the rate of interest was still 3 percentage
points higher than in the last quarter of 1998, when the Bank raised interest by 4 percentage
points and thus prevented the steep rise in inflation expectations in that quarter from translating
into a rise in inflation.
From the second half of April till the middle of May, the NIS weakened against the currency
basket. This reversal was due to several factors, including greater political uncertainty due to
the approaching election on May 17. In the last week of April, foreign-currency-indexed
options traded on the stock exchange expired, a day after the Bank of Israel announced a
further reduction of half a percentage point in the rate of interest. As a result of the importance
attached to the price at which options are exercised (the representative exchange rate on the
date they expire), exchange-rate volatility can rise as the expiry date gets closer. Unlike other
occasions when options expired and the exchange rate remained stable, in this instance there
was depreciation during the morning of the expiry date, April 27.
Other factors which boosted demand for foreign currency in this period were the narrowing
of the differentials between the rate of interest in Israel and abroad (see Diagram3), and the
sale of some $ 90 million of bank shares to foreign investors. As the shares were a sheqel asset,
their purchase placed the investors in a position of currency exposure to the sheqel. To protect
themselves against this exposure, they bought dollars with NIS in forward transactions,
creating demand for foreign currency in the market. However, since payment was made in
foreign currency directly to the government, no counterweighing supply of foreign currency
appeared on the market.
From mid-May until mid-July, before the new government's economic policy had been
formulated, the NIS/dollar exchange rate remained stable. During this time the dollar
strengthened against the euro, reflected in the stronger trend of the NIS against the currency
basket; although this trend reversed in the run-up to the election, it strengthened again
thereafter, and the nominal exchange rate peaked on July 19, when the NIS was traded at a rate
7.2 percent above the lower limit of the band.
From the middle of July till the middle of October there was strong demand for foreign
currency, some of which was due to the uncertainty prevailing before the budget guidelines had
been determined, as well as falling prices in the capital markets of industrialized countries.
These declines were the result of expectations of monetary tightening in the US, expectations
which were realized, and of growing worldwide concern at the effects of the transition to the
year 2000. These considerations led various companies to bring forward their new financing,
and made investors switch to the most secure and liquid assets (this occurred mainly in the
months May–August). The rise in the rate of interest abroad on the one hand, and the lowering
of interest by the Bank of Israel (by 0.5 percentage points at the end of August) on the other,
narrowed the differential between domestic and foreign interest rates, which also contributed to
the strengthening of demand for foreign currency. The nominal exchange rate reached its
highest level of the year in the second half of October when the NIS was traded at between
12.2 percent and 13.7 percent above the band's lower limit.
Despite a cumulative rise of 6 percent in the average currency-basket exchange rate in
August and September, inflation expectations responded with a rise of only 1 percentage point,
from 4.8 percent in July to 5.8 percent in September. In contrast, depreciation by a similar
amount (6.7 percent) in August–September 1998 led to a 3.1 percentage point rise in inflation
expectations. This may indicate that the relation between exchange-rate fluctuations and
inflation expectations has become weaker than it was in the past, although there is still a clear
link between them. The loosening of the link between inflation and the exchange rate in a
floating-exchange-rate regime is a function of the central bank's commitment to achieving the
inflation target and the extent to which the public believe that the Bank will succeed in fulfilling
this commitment. In such a situation, a rise in the exchange rate beyond a rate consistent with
the inflation target will cause the public to sell foreign currency, in the knowledge that the
central bank will act—by raising the rate of interest—to achieve the inflation target. Sales of
foreign currency will lower the exchange rate, making a rise in the interest rate unnecessary.
From the second half of October until the end of December the trend of the currency-basket
exchange rate reversed, with the NIS appreciating by 4.4 percent in that period. This
development was affected by the buoyant trend in stock markets world wide, and specially in
the US, and the lessening of concern regarding the transition to the new millennium. Other
factors directly associated with Israel's economy also helped the strengthening of the NIS,
including the resumption of peace negotiations with Syria and improvements in Israel's credit
rating. The calm in the foreign currency market continued despite several events that could
have caused concern, such as the announcement in mid-November of the impending resignation
of the Governor of the Bank of Israel. Evidently the public expects the anti-inflation policy to
continue, in the light of the Prime Minister's declaration that the policy pursued by the Bank of
Israel in the last few years would be maintained. This assessment by the public encouraged
investment in the NIS. The confidence which the public has in the anti-inflation policy was also
reflected by the continued downward trend in inflation expectations and actual inflation in this
period. Against this background, and in the light of the calmer international financial situation,
the Bank of Israel reduced the interest rate further—by 0.3 percentage points at the end of
November, and by 0.5 percentage points at the end of December. The calm continued into the
new year as the fears regarding the millennium bug dissipated, and with the announcement of
the intention to appoint David Klein as the new Governor of the Bank.

Volatility⁴ of the exchange rate of the NIS against the currency basket was 5.8 percent, on
average, similar to its level prior to the middle of 1998 (see Diagram4). In a period of calm,
the NIS/$ exchange rate is less volatile than other currencies comparable to the NIS (see Table
1). For example, the average volatility of the NIS/$ exchange rate from February to December
1999 was 4.6 percent, while the average volatility of the Czech koruna/$ and the New Zealand
dollar/$ exchange rates were 9.9 percent and 10.4 percent respectively. There were periods in
1998–99 when some foreign exchange markets were exceptionally volatile, due to various
crises, such as that in East Asia, Russia's default, the collapse of the LTCM hedge fund, and
the crisis in South America. In such periods, the volatility of the NIS rose by more than did
other currencies; this emerges from an analysis of the maximum and the average volatility in a
period when the market was specially volatile. Israel experienced only one such period—from
August to October 1998, when the market reacted to the crisis in Russia and that of the LTCM
hedge fund. In that period the volatility of the NIS rose more than did those of the other
currencies, but on only 32 trading days did the standard deviation of the NIS/$ exchange rate
exceed 15 percent, compared with 72 days on which the New Zealand dollar/$ exchange rate
did so, and 103 days when the Czech koruna/$ rate did so (the analysis covered 488 trading
days). It is difficult to explain this phenomenon, but it may be connected to the fact that the
NIS, unlike the other currencies, is traded mainly on the domestic market.

Table 1: The Volatility of the exchange rate of several currencies against the dollar

	No. of days on which the volatility exceeded 15% ¹	Maximum volatility	Average volatility on days when it exceeded 15% ¹	Average Volatility 2/99-12/99
NIS	32	26.63%	22.05%	4.56%
Currency basket	52	30.14%	21.18%	5.64%
Canadian dollar	-	14.05%	-	5.96%
S.african rand	161	38.95%	23.91%	8.03%
Norwegian krona	22	23.90%	22.86%	9.03%
Swedish korona	46	19.82%	17.06%	9.37%
Czech koruna	103	21.17%	16.06%	9.92%
New Zealand dollar	72	22.32%	19.19%	10.41%

¹⁾ On the last two years.

The Intra-day volatility of the exchange rate, defined as the spread between the lowest and
the highest exchange rates recorded in interbank trading on each day, was stable for most of
the year, and slightly higher than in 1998. With very few exceptions, the spread did not exceed
two agorot. In the middle of January the spread expanded to 7.96 agorot, a reaction to the
crisis in Brazil, but in that same week it shrank back to between 1–2 agorot and 3–4 agorot. At
the end of April the spread widened to 7.6 agorot for one day, the day when
foreign-currency-indexed options expired, returning to its norm the next day (see Diagram5).
Since June 1997 the Bank of Israel has not intervened in the foreign currency market,
apart from six days around the end of 1997. It did not intervene even in October 1998 when the
NIS depreciated by 13.4 percent against the currency basket, moving to 19.8 percent above the
lower limit of the band, when the total width of the band was 30.9 percent. The Bank of
Israel's policy of nonintervention in the foreign currency market is based on experience gained
from those periods in which it did intervene and on the experience of other central banks. This
experience shows that intervention is ineffective. Moreover, it disrupts both the internalization
of the exchange-rate risk inherent in foreign currency activity, and the balancing effect which
the widening of the bid/offer spread has (at times of volatile trading) on the volume of trade. In
addition, nonintervention keeps the reserves at a higher level. The higher the level of the
reserves, the greater the chances of defending the crawling band if the exchange rate reaches
the upper limit of the band.

Trade in the dollar/NIS market

The daily volume of trade averaged $ 818 million, a rise of 22 percent from the 1998 level.
Deducting swaps transactions between banks and their customers gives an average daily trade
of $ 508 million, up from $ 483 million in 1998 (see Diagram6). In July, average daily trade
reached its highest level for the year, $ 1,104 million including swaps, and $ 590 million
excluding swaps. In the same month the NIS underwent the greatest monthly depreciation of
the year against the currency basket (3.4 percent).
The average daily volume of interbank trade in 1999 was 10 percent lower than in 1998, at
$ 104 million, down from $ 114 million.
Average daily trade between banks and their customers came to $ 714 million including
swaps, and $ 405 million excluding swaps; the totals for 1998 were $ 555 million and $ 368
million respectively. These amounts reflect the rising share of swaps within total trade with
customers: in 1999 swaps constituted 43 percent of this total, up from 34 percent in 1998 and
22 percent in 1997.
The increase in the volume of trade in 1998–99, which reflected the rise in banks' trade with
customers, was a result of the process of liberalization in foreign currency, a process which
advanced rapidly in May 1998. The increased share of swaps within total trade may reflect
foreign investors' increasing involvement in Israel's economy. This is a further expression of
the improvement in and deepening of the foreign currency market.
Since November 1996, a currency broker has operated in the interbank market. The broker
plays an important role in interbank trading, increasing trading efficiency and reducing
transaction costs. This is reflected inter alia by the reduced bid/offer spread in interbank
trading. This spread is generally less than half an agora, although it can increase to between 2
and 3 agorot in periods of heightened uncertainty. In extreme situations, such as that in
October 1998, it has risen to about 10 agorot. The spreads which banks display on Reuters are
usually higher than those at which they perform transactions in the interbank market. The
actual spread is normally closer to those quoted by the broker.
Another development evident in the last few years has been the expansion of activity in Israel
by foreign financial institutions both for their customers and for themselves. This is an outcome
of the liberalization of the foreign currency market and the removal of most of the restrictions
on trading in NIS. Further progress in Israel's integration into the global economy can be seen
in the decisions by foreign banks to open branches in Israel; approval has been granted recently
to CitiBank and to the Republic National Bank of New York (Suisse). Other foreign banks
have indicated their intentions of starting the process of opening branches in Israel.
Another important development has been the introduction of a standard for determining NIS
rates of interest—the Tel Aviv Interbank Offered Rate (Telbor). These rates are derived from
data on interest rates for different periods, displayed by the commercial banks on Reuters. The
Telbor rates are also published on Reuters, and will help to develop the derivatives market and
strengthen the link between the money markets and the foreign currency market, a link which is
vital for the continued improvement of the money and capital markets.
----------------------------------------

¹Exchange rates quoted in this chapter are representative rates (see Appendix 1).
² A fall in the exchange rate (i.e., a move towards the lower limit of the band) means
     appreciation, and a rise in the exchange rate means depreciation of the NIS.
³ The width of the crawling band and the distance of the exchange rate from the upper and
    lower limits are calculated in terms of the average of the upper and lower limits of the band.
⁴ The volatility of the exchange rate is defined as the standard deviation of exchange-rate
   changes during the previous thirty trading days.

Diagram 1

Diagram 2

Diagram 3

Diagram 4

Diagram 5

Diagram 6

Appendix 1

Representative Rates (5)

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(6); 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(7). 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(8). 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 soon after 15.15 (or soon after 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(9).
________________
Footnotes
(5) This information is current at the time of publication (January 2000). It does not replace any law,
regulation, or directive. Additional details and explanations may be obtained from the General
Information Center, Foreign Currency Department, Bank of Israel, Tel. 02-6552321.
(6) The representative rate of a foreign currency is not necessarily identical with any of its going
exchange rates, e.g., rates quoted by commercial banks to their customers, buying and selling rates of
banknotes, checks and transfers, and interbank rates.
(7) Until July 31, 1986, no representative rate was published for the currency of a country on its
national holidays.
(8) For the transition to the continuous two-sided trading system, see the 1994 issue of this publication,
pp. xv-xviii.
(9) Note that there may be differences between exchange rates calculated (in NIS) for the currencies of
the EMU member countries via the Euro representative rate, and their representative rates as published
by the Bank of Israel. For a detailed explanation of this difference, see the Press Announcement dated
September 15, 1998.

Appendix 2
The Currency Basket

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). Since the inception of the basket, the parameters of the exchange-rate regime (today - the exchange rate band) have been set in terms of the basket rather than in terms of a specific currency.

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. Similar reviews undertaken in April 1998 and in April 1999 (i.e., of trade in 1997 and in 1998) 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)

Currency basket	Date	US dollar	German mark	Pound sterling	French franc	Japanese yen	Euro

When determining composition
1986	01.08.86	60.0	20.0	10.0	5.0	5.0
1995	05.06.95	54.8	24.2	8.3	5.6	7.1
1996	30.04.96	60.3	21.0	8.0	5.1	5.6

At year end
	31.12.96	60.3	20.7	9.0	5.0	5.0
	31.12.97	63.0	18.7	9.1	4.6	4.7
	31.12.98	62.0	19.7	8.2	4.8	5.3
	31.12.99	63.4	-	9.0	-	6.0	21.6

Table 2: Units of each currency in basket

Currency basket	US dollar	German mark	Pound sterling	French franc	Japanese yen	Euro
1986	0.6000	0.4177	0.0670	0.3394	7.7000
1995	0.6732	0.3964	0.0604	0.3222	7.0106
1996	0.6741	0.3588	0.0589	0.2933	6.5437
1996 (Euro)	0.6741	-	0.0589	-	6.5437	0.2282

Appendix 3

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

		Currency Basket			US$
Date of change	Change	Mid-point	Repre- sentative rate	Change from previous day	Repre- sentative rate	Change from previous day
		(NIS)	(NIS)	(percent)	(NIS)	(percent)
03.01.89	Band introduced
03.01.89	Midpoint raised by 13%(1); limits ±3%	1.9480	1.9479
23.06.89	Midpoint raised by 6%	2.0649	2.0639	4.3	2.0175	4.4
01.03.90	Midpoint raised by 6% Band widened to ±5%	2.1888	2.0941	-0.1	1.9626	0.2
10.09.90	Midpoint raised by 10%	2.4077	2.3086	2.4	2.0800	2.8
11.03.91	Midpoint raised by 6%	2.5522	2.4252	5.8	2.1920	6.7
17.12.91	Introduction of crawling band
17.12.91	Midpoint raised by 3% Slope of band 9%	2.6288	2.5647	0.1	2.3100	0.1
09.11.92	Midpoint raised by 3% Slope reduced to 8%	2.9251	2.8707	0.3	2.6350	0.6
26.07.93	Midpoint raised by 2% Slope reduced to 6%	3.1511	3.0709	1.9	2.8650	2.1
31.05.95	Midpoint raised by 0.8% Band widened to ±7% No change to slope	3.5372	3.5200	0.4	3.0050	0.3
18.06.97	Band widened to reach ±15% by end of year Slope of lower limit 4% Slope of upper limit 6%	3.7072(2) 4.9213(2)	3.7155	0.2	3.4200	0.1
17.08.98	Slope of lower limit 2% Slope of upper limit 6%	3.8760(2) 5.2583(2)	3.9661	1.7	3.7160	1.8

(1) Including a rise of 5% on 27.12.88.
(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.

Appendix 4

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.

Appendix Table 1

Changes in Exchange Rates Against the US$ and the Currency Basket

A. Until October 1977 - official rates(1)

Date of devaluation	US$ rate		Currency basket rate
	Israeli pound
15.05.48	0.250
19.09.49(2)	0.357
01.01.54	1.80	Par
10.02.62	3.00	value		Fixed rate*
19.11.67	3.50
22.08.71	4.20
10.11.74	6.00
18.06.75	6.12

05.08.75	6.24
09.09.75	6.36
28.09.75	7.00
24.11.75	7.10
04.01.76	7.24	Buying
11.02.76	7.38	rate
15.03.76	7.52
19.04.76	7.67
20.05.76	7.82
24.06.76	7.97		Israeli pound
19.07.76			8.12
25.08.76			8.25
29.09.76			8.40
01.11.76			8.56
24.11.76			8.73	Creeping
24.12.76			8.90	devaluations
17.01.77			9.07
02.03.77			9.25
21.03.77			9.42
25.05.77			9.60
04.07.77			9.79
18.07.77			9.98
01.08.77			10.17
17.08.77			10.37
20.09.77			10.57
17.10.77			10.78

05.1948 - 09.1949	For hard currencies	0.333
05.1952 - 01.1954	For most commodities	0.714 and 1.00
	For non-profit institutions	1.00
01.1954 - 08.1954	For most commodities	1.00
	For non-profit institutions	1.30
08.1954 - 10.1955	For non-profit institutions	1.30
10.1955 - 04.1958	For non-profit institutions	1.50

B. October 1977 - January 1989, Representative Rates(3)

Date of devaluation

US$ rate

Currency basket rate

	Rate of devaluation		Rate	Rate of devaluation		Rate
	(%)		Israeli pound	(%)
31.10.77	47.2		15.2500

			Sheqel
10.08.83	7.2		56.9804				Floating
10.10.83	5.5		69.2697				rate
11.10.83	16.5	23.0(4)	80.7296
17.09.84	8.7		395.7900
01.07.85	18.8		1,500.0000


			NIS			NIS
01.08.86(5)			1.4923			1.4923
13.01.87	9.7		1.6400	10.1		1.6803	Fixed
27.12.88	5.1		1.6800	5.0		1.8038	Rate*
03.01.89(6)	7.2	13.0(4)	1.8065	8.0	13.4(4)	1.9479

(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.

Foreign-Currency Exchange Rates of 24 currencies, including
those in the currency basket (Daily data)

EXCEL files (in ZIP format), each file includes representative rates published by

the Bank of Israel, covering several years.

1977 - 1981

1982 - 1986

1987 - 1991

1992 - 1996

1997 - 2000

2001 onward