BoI Governor Stanley Fischer
Tonight's debate is expected to focus even more on the China talking point.
However, there is one country you won't hear either candidate criticize tonight, even though it's been intervening to prevent its currency from strengthening against the dollar as well: Israel.
And when you look at Israel's foreign exchange holdings as a percentage of GDP, you see that at 61 percent, Israel's ratio is significantly higher than that of China, which stands around 45 percent.
The chart below shows the Bank of Israel's foreign currency reserves, which have ballooned since early 2008 when the central bank began buying up dollars and selling shekels.
By selling shekels against the dollar, the BoI hopes to keep its currency from strengthening, making exports more competitive vis-a-vis dollar-based exporters like those in the United States.
In March
2008, the central bank began intervening in
the foreign exchange market –
for the first time since 1997 –
stating that its goal was to
increase international reserves up to 100%
of short-term debt, as prescribed
by the “Greenspan-Guidotti Rule." At
the time, foreign reserves (USD 29.4
billion) stood at 81% of external short-term
debt.
There was
an initial unannounced intervention, which
was followed by announcement of a schedule
of foreign-currency purchases. At
first, the bank purchased the equivalent of
USD 25 million per day with a view to raising
reserves to a value of USD 35-40 billion. In
July 2008 the daily purchase was
increased to USD 100 million, and
in November the reserve target was raised to
USD 40-44 billion.
By March
2009, foreign exchange reserves had
increased to USD 40.6 billion, nearly 100%
of external short-term debt; and, relative
to GDP, reserves had reached a very high
level compared with other small open
economies and with historical Israeli
values. Nevertheless, the Bank announced
that it would continue the intervention, and
its press releases increasingly
referred to concerns about the level of
the exchange rate, rather than reserve
levels.
Regular
intervention was finally stopped in August
2009, but a week prior to this the Bank
announced a new policy of discretionary
intervention. The Bank does
reveal how much it purchases in monthly data
on foreign-exchange reserves, and these
confirm that intervention has continued. Markets
now consider the Bank to have a “dirty
float” policy on the exchange rate and
speculate as to what its intervention price
is. For instance, some observers believe
this to be around 3.8 shekels to the US
dollar.
At the time, Fischer said the stronger shekel was not a problem, but he also hinted at more intervention. Via WSJ's Anjali Cordeiro:
Fischer said that
if the shekel starts to move in directions
that aren't in keeping with the central bank's
estimates of where the market and the economy
are, "we will have to intervene."
"We don't know
what the level of intervention is going to be.
We hope it will be minimal," Fischer said,
adding that the bank doesn't publish its views
on appropriate levels for the currency.
The Bank of Israel's website states that the interventions are designed to contribute "to the success of the whole economy, to economic growth, and to increased employment," and that as a result of the policy, "the whole economy reaps the benefit of economic strength, enhanced financial stability, protection against unexpected events, and reduced vulnerability to various crises."
And some of those dollars have ended up in an interesting place. On March 1, the BoI announced that it would actually invest $1.5-2 billion of its reserves in the U.S. stock market.
The BoI has faced some internal criticism recently over its interventionism. The State Comptroller's Office released a particularly negative report last week calling the operations into question.
Via the Israeli business daily Globes:
Management of the
bank's reserves is conducted in comparison
with a benchmark portfolio, known as the
numeraire, a hypothetical currency made up of
the currencies of Israel's trading partners. The
report criticizes the lack of transparency
in setting the makeup of the numeraire,
and also mentions that the audit failed to
find tools with which the division could
measure the overall risk of the reserves
portfolio in extreme conditions.
It was also found
that the foreign currency committee and the
narrow monetary committee, two committee's
chaired by Governor of the Bank of Israel that
set policy for managing the reserves, have
been acting without written procedures
regulating their activity and the
relationship between them.
Of course, the Israeli economy is so small, nobody thinks it's a serious threat to big US industries, but the point remains that China is far from unique in its efforts to control its currency for export purposes.
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