Stick to shekels

Instead of trying to predict dollar's future, Israelis should stick to local currency

Two months have passed since the "crash" on the stock markets in Israel and abroad was announced. Two months, and it's as if the crash never happened. Stock markets are rising again and the dollar is down again. Stock indexes in Tel Aviv, just like in New York, are back to record levels and the price of the dollar here, as well as in America, has again hit a low point.

 

Is the conclusion here that there is no reason to get anxious about what what's going on in the depths of global financial markets, which see a daily circulation of at least $10,000 billion?

 

We are allowed to be anxious. It's natural and it's also essential in order to sharpen our sense of caution. Yet we must not rely on the forecasts, assessments, and analysis of the finest analysts, experts, and consultants. They are always wise after the fact and know how to explain very nicely what already happened, and not what is about to happen. Most importantly: They express the popular sentiment. When stock markets drop for three straight days, they will spread grim predictions regarding an inevitable future crisis. The headlines will scream out: "Panic."

 

When the dollar will rise by two percent, they will use the word "leap." Later, when stock markets will suddenly start rising again, they will unflinchingly make an about face and explain that "at this time the economic horizon is completely clear, and this tide will last forever." And the dollar, how could it be otherwise, has "collapsed."

 

The dollar did not collapse. It merely weakened. From the beginning of 2007, the dollar exchange rate vis-à-vis the shekel declined by 5 percent (and by 7 percent vis-à-vis the euro.) In the past month, it declined by 3.5 percent. Such fluctuations are not unusual anywhere in the world, and certainly when it comes to a currency like the shekel, which is used in a very limited fashion and whose volume of trade is very small. By the way, the shekel actually depreciated in September, by 2.5 percent.

 

These fluctuations are a blessing. They liberate the Israeli public from its strange addiction to the dollar. People stop you on the street and ask with inexplicable concern: So what's going to happen with the dollar? The answer to their question should be: Excuse me, dear sir, why do you care? Do you earn your salary in dollars? Do you pay in dollars? Do you breathe in dollars? Do you save in dollars? Israelis encounter dollars almost only when they travel to America.

 

Eighty percent of the prices in our country are no longer linked to the dollar and are unaffected by its fluctuations, but rather, reflect the local forces of supply and demand. Recessions make goods cheaper, while economic tides make them more expensive, with the dollar playing a minor role. This is the case when it comes to fashion, cars, and banking services. Import companies such as IKEA, and there are many like it, set their prices in shekels for a year in advance; the importer knows how to protect itself from unexpected fluctuations in currency exchange rates. In financial terms, this is called hedging.

 

Shekel is still undervalued

There is no point in going to showrooms to check whether the prices of new vehicles have already "adjusted themselves" to the rise in the shekel. They did not. A wise importer maintains a set price in shekels for long months, and an exporter from Israel must also know how to utilize sophisticated hedging tools, which are a sort of insurance against a rising shekel.

 

What is still linked to the dollar? Various types of rental prices, fuel, basic imported raw materials, second-hand real estate, and prices of services in the computer industry, wedding halls, and the communication industry. This is the last remnant of an ancient period where the dollar exchange rate served as the Israeli economy's anchor.

 

Yet this anchor has been lifted a decade ago, and since then this voluntary linkage of rental prices or the price of a meal at a wedding to the dollar is a zero-sum game: For every person who benefits from a rise or drop, there is someone else who loses.

 

These days it has become fashionable to predict the continued drop in the dollar exchange rate. When it comes to the euro, expectations become the basis for decisions: The interest rate on dollars is expected to decline while its European counterpart is expected evaluated on the basis of long-term vision of a positive balance of payments and the massive entry of foreign capital.

 

Interest rates on the dollar and euro will eventually equal each other, and the shekel is still being traded below its real purchasing power: According to the International Monetary Fund, what you buy for one dollar in America will cost you three shekels in Israel. Yet until this happens, much water may flow through the global currency ocean, and in directions that contradict this trend.

 

For example, if the US Federal Reserve Bank stops the interest rate decline, this will cause a (temporary) demand for the dollar and boost it; negative inflation in Israel will cause currency traders to switch from the shekel to dollars; renewed tensions in credit markets could disrupt all the predictions.

 

In short, our hair will turn white if we attempt to predict what will happen to the dollar tomorrow or two days from now. Forget about the dollar, Israelis. Stick to the shekel.