The Israeli Shekel continued it’s huge spike against the US dollar this week, rising more than 4%, as news that the US Federal Reserve will buy bonds. According to Globes: “The shekel-dollar exchange rate is down 1.84% to NIS 4.048/$, and the shekel-euro rate is up 2.13% at NIS 5.521/€. The US Federal Reserve Bank yesterday left its Fed Funds rate unchanged, as expected, but surprised many investors and economists in announcing its will buy about $1 trillion in securities - $300 billion of US government bonds as well as $750 billion mortgage-backed securities. The move is intended to lower longer term interest rates and support the US economy. The move pushed Wall Street to rises yesterday, and has pressured the dollar on global markets.”

It’s sure nice to be able print money at will, and heck, those that are currently printing will be long gone when the children and grandchildren have to pay the piper.

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It looks like Bank of Israel head Stanley Fischer, may resort to another round of rate cuts, as he attempts to navigate the Israeli economy through the global economic abyss. While most pundits thought that he was done cutting interest rates, yesterday, Fischer hinted that more rate cuts were on the way.

According to Globes: “Governor of the Bank of Israel Prof. Stanley Fischer today declared, “We’re examining further interest rate cuts.” The announcement contrasts with the message implied in last month’s interest rate decision that no new interest rate cuts were likely for the time being. He made the comment at today’s Atnachta Conference in Jerusalem. Fischer added, “We must work fully with the Ministry of Finance to formulate economic policy. It’s important to remember that we have one patient, the economy, and we’re not two different doctors each offering his own medicine without coordinating with the other. We will coordinate and continue to work together. I hope that we will win.”

Without a functioning government, it’s up to Fischer to set policy to help Israel deal with the global economic crisis. There is no question that while growth in Israel has gone negative, the fundamentals of the economy are far better than those of most western countries.

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With lower interest rates on the horizon, forecasts of larger budget deficits, and a quickly sinking economy, the US Dollar is continuing its dramatic move against the Israeli shekel. It currently trading around the  4.13 level. The shekel, which had been one of the worlds strongest currencies, has gotten slammed against the greenback in recent months.

many market oarticipants forecast continued shekel weakening and say that we could see the 4.3-4.5 level hit in the near future.

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The Bank of Israel surprised analysts by cutting interest rates a full 50 basis points to 2.5% This is the lowest level rates have ever been in Israeli history. Clearly this is a signal that the BOI is expecting much slower economic growth moving forward. Coupled with non-existent inflation it appears that the BOI felt that a bigger rate cut than was expected was justified to hep jump-start the economy.

As a result the Shekel looks to be weakening slightly and look for a move up in Israeli bonds tomorrow.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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