Could someone who understands finance and banking economics explain this article

[Ari Ben-Canaan]

I am not 100% sure to make of this article.  What is the problem w/ a strong Shekel?

http://www.haaretz.com/print-edition/business/all-that-glitters-how-to-fight-the-strong-shekel-1.317032

"All that Glitters / How to fight the strong shekel
What to be done about the mighty Israeli currency? The government has a few ideas, and Stanley Fischer has some ideas of his own
By Eyten Avriel

When trouble comes, it doesn't drizzle. It pours. Maybe that's what Bank of Israel governor Stanley Fischer was thinking over the holiday every time he glanced at the Bloomberg market-tracking system in his home. The screen showed fluctuations in exchange rates, and Fischer didn't like what he was seeing. Major currencies were gaining ground against the dollar, and the shekel was gaining the most.

On Thursday, for instance, while Israel's finance players relaxed on the beach, Fischer watched the shekel climb in interbank trading in London to worrying levels: NIS 3.62 per dollar. And he couldn't do a thing about it, at least not until Friday morning.

So it was that 10 minutes after trading opened on Friday, Bank of Israel dealers got in touch with dealing rooms at the banks and aggressively bought dollars. At first the trades were at NIS 3.634 per dollar, but Fischer didn't stop buying even when he himself was causing the exchange rate to rise. The rate climbed to NIS 3.64, and with it, we saw an increase in the effective exchange rate of the basket (which is the basis for Bank of Israel moves in the forex market, not the dollar exchange rate per se ).

But as the basket climbed, the dollar continued to weaken in world markets, countering the efficacy of the Bank of Israel's moves. After five hours of intensive trading, it turned out the Bank of Israel had bought more than $300 million worth of dollars and had raised the rate of the shekel against the basket by a third of a percent, but the exchange rate of the dollar dropped 0.6% to NIS 3.645.

Who sold the dollars that Fischer bought? Dealers say that foreign investors, delighted at the Bank of Israel rate hike to 2%, were as usual the dominant force in selling.

But that's just the story of a single day, a single skirmish between foreign investors and the Bank of Israel. The war over the exchange rate rages on, and the threats that Stanley Fischer faces are big and scary. They include the Bank of Israel's interest rate, which at 2% is almost 2% above interest rates in the west; Israel's current account surplus; and the likelihood that dollars will pour into the country because of all that gas found under the Mediterranean Sea. All threaten to continue inflating the shekel.

The Finance Ministry and Prime Minister's Office are concerned about the shekel's appreciation and frowned on the Bank of Israel's interest rate hike for October. They see two possibilities, the first being an administrative move - to slap a tax on short-term speculative shekel deposits by foreign investors. At present, foreign investors aren't taxed on interest profits. A tax would change the risk-reward equation for speculators. While nobody wants to close down Israel to foreign capital, a modest tax of 10% to 20% on interest gains would moderate the intensity of speculative attacks.

The second possibility, a more original one, is to create a market for long-term options on the shekel/dollar exchange rate, backed by the government. It could be done because Israel has foreign debt denominated in dollars, and institutional investors - provident funds, pension funds and insurance companies - might agree to make long-term overseas investments if they could hedge their currency exposure.

A jump in overseas financial investment by Israelis could be a positive development. It would offset some of the dollars streaming into the country and also reduce the public's dependence on the domestic capital market. That dependence would turn out to be disastrous if a local crisis were to strike, be it war or a major earthquake, for instance. Proponents of this proposal say it's a win-win: The state would hedge the currency exposure of its foreign debt (most of which is in dollars ) and institutional investors would receive protection against appreciation of the shekel.

Fischer doesn't particularly like either idea, it seems. He'd prefer that the Israeli government not intervene in the marketplace. For the time being he can argue that his policy is working, more or less. It's true that for three years he's been buying dollars occasionally, which has increased Israel's foreign currency reserves to more than $60 billion. But looking at the big picture, the shekel is pretty steady.

From the begin ing of the year, it has strengthened by 4% against the dollar, less than other currencies have - such as the euro (up 5% against the dollar ), the yen (up 10% ), or the Swiss franc (which has gained 8% against the dollar ). Fischer feels that even if the shekel continues to swing, say 5% in either direction, it's not the end of the world. Right now there's no need to do anything, he feels."

[Meerkat]

what im getting is the following:

the US$ is going dont the sh*thole (bad)

while the NIS is rising fast. (good)

[Lewinsky Stinks, Dr. Brennan Rocks]

What? I thought that all Jews knew all about finance, banking, and currency, because you know all Jews are rich bankers and it is a well-known fact that they control the world's economy. 

[Ari Ben-Canaan]

What? I thought that all Jews knew all about finance, banking, and currency, because you know all Jews are rich bankers and it is a well-known fact that they control the world's economy. 

 

[Lewinsky Stinks, Dr. Brennan Rocks]

An' less I be fogettin', it also be komon nolleje dat blacks were da first siantists!

[Zelhar]

Stronger currency hurt exports which is why every country is trying to weaken its currency these days. The problem is that the major currencies € and $ £ are really garbage currencies because their respective governments keeps printing money and increase their deficit. China pegs its yuan artificially to these garbage currencies and so countries with more liberal markets and relatively healthy economy like Israel must weaken their currency by buying dollars to stay competitive.

[Ari Ben-Canaan]

Stronger currency hurt exports which is why every country is trying to weaken its currency these days. The problem is that the major currencies € and $ £ are really garbage currencies because their respective governments keeps printing money and increase their deficit. China pegs its yuan artificially to these garbage currencies and so countries with more liberal markets and relatively healthy economy like Israel must weaken their currency by buying dollars to stay competitive.

Thank you for explaining this to me.  Its much clearer for me now.

[Yaakov Mendel]

The Bank of Israel is buying dollar in an effort to counter excessive appreciation of the shekel, which, as Zelhar pointed out, is bad for exports because Israeli goods become too expensive and thus less competitive - although price is not the only source of competitiveness.
The problem is that, if market forces have a major incentive to buy shekel, the Bank of Israel does not have the power to reverse that trend only by selling shekel, even if it holds substantial currency reserves. Even coordinated interventions of major central banks may fail against market forces when trying to influence the level of an exchange rate.
What is the main factor that pushes shekel higher ? The return that is paid out to investors who hold deposits denominated in shekel, i.e. the short term interest rate. That level is substantially higher than that in America or in Europe or in Japan at the moment. So, considering that default risk on these short term deposits in Israel is perceived by the market as insignificant, no wonder that there is a lot of capital inflow into shekel-denominated assets, which automatically pushes shekel higher.
That is why the government of Israel is considering a tax on foreign investment on short term deposits in the hope that it would deter too much capital inflow. The other proposed solution is more creative. It consists of creating a large, liquid market of options on the USD - SHK exchange rate. To put it briefly, currency options are derivative contracts that allow to investors to hedge their exchange rate exposure. The expected positive result is to push Israeli institutional investors ("big" investors) to buy more foreign assets, thus driving the shekel down, because they would not have to worry about the uncertainty in the exchange rate of the shekel.

[Ulli]

The Bank of Israel is buying dollar in an effort to counter excessive appreciation of the shekel, which, as Zelhar pointed out, is bad for exports because Israeli goods become too expensive and thus less competitive - although price is not the only source of competitiveness.
The problem is that, if market forces have a major incentive to buy shekel, the Bank of Israel does not have the power to reverse that trend only by selling shekel, even if it holds substantial currency reserves. Even coordinated interventions of major central banks may fail against market forces when trying to influence the level of an exchange rate.
What is the main factor that pushes shekel higher ? The return that is paid out to investors who hold deposits denominated in shekel, i.e. the short term interest rate. That level is substantially higher than that in America or in Europe or in Japan at the moment. So, considering that default risk on these short term deposits in Israel is perceived by the market as insignificant, no wonder that there is a lot of capital inflow into shekel-denominated assets, which automatically pushes shekel higher.
That is why the government of Israel is considering a tax on foreign investment on short term deposits in the hope that it would deter too much capital inflow. The other proposed solution is more creative. It consists of creating a large, liquid market of options on the USD - SHK exchange rate. To put it briefly, currency options are derivative contracts that allow to investors to hedge their exchange rate exposure. The expected positive result is to push Israeli institutional investors ("big" investors) to buy more foreign assets, thus driving the shekel down, because they would not have to worry about the uncertainty in the exchange rate of the shekel.

Lots of countries would be glad to have the economic problems Israel has. 

[Lewinsky Stinks, Dr. Brennan Rocks]

Israel would be one of the richest per capita nations on earth if it got rid of the parasites and ended the socialist crap.

[briann]

Ideally, you dont want your currency to be too undervalued or too overvalued.  Back in the 90's The US dollar was overvalued because people around the world were putting their money into the US as a sort of safe-haven, and eventually, it became a bit of a bubble. 

At the time, this was great for Americans traveling abroad or importing things, because everything was so cheap elsewhere... but it became VERY tough to export goods/services because no one wanted to pay for expensive American items. 

So to make a long story short, an overvalued currency causes trade imbalances which adds to the trade deficit.

ALSO, eventually this bubble breaks... since a currency can only be overvalued for so long, and then you are stuck with a undervalued currency, which makes things pricier to import.

NOW THE TRICKY PART IS!!!!, Dont confuse this with a currency losing its value because of inflation.  That is much worse, and is not caused by international market forces, but instead is caused by a corrupt or poorly managed central bank printing too much money.  YOu NEVER want this, as it can cause all sorts of problems...... problems that we may be going through soon.

[MassuhDGoodName]

Re:  "What is the problem w/ a strong Shekel? "

This article is dealing with the "strength" at any given moment of any one nation's national unit of currency.

It is often said by professional economists that "No one actually understands economics."

So considering that is true, here's my feeblest of explanations:

Today all modern nations no longer base their currency on gold or silver, but have established currencies that are "free floating" in respect to all other "free floating" national currencies in use for international trade and business.

This results in a constant flux in the rate of exchange of national currencies:

If your dollar bill is equivalent at the airport or bank exchange counter to one hundred and fifty Israeli shekels, you then find yourself able to tour Israel, find five star hotel accommodations, and buy gifts to bring home which any average Israeli citizen could never dream of affording.

Consider the following oversimplified examples (while keeping in mind that it's not possible to fully explain all of the factors and processes responsible for international currency values and exchange rates).

No doubt you've heard people say things like "In Mexico Americans can retire on a modest pension, afford to live in a luxurious villa, and afford two or three hired servants, all for the cost of a few dollars a day!"

And rather than feel abused and exploited by such a business relationship, Mexican lower class peons are delighted to find work which pays them wages of $1/day working as house servants doing all the cooking and cleaning for American retirees!

This is because in their country, one U.S. dollar has an exchange rate value of 100 pesos [simply a random number I use for easy example], which in Mexico is essentially like a Mexican having one hundred dollars in spending value on local goods and services - enough to move from a cardboard shack to a better dwelling, and provide food and clothing for an entire family.  If they were to work for Mexican employers and be paid an average daily Mexican wage they would only have about $4 or $5 of purchasing power for every 10 hour day worked.  That would be much like Americans working a full week and only ending up with about $25 to live on.

And this comparison is not exact, because the daily exchange rate value of Mexican money in relation to the EU and USD affects how much their paychecks can buy inside Mexico.

Other factors such as Mexico producing and manufacturing far less goods and services for export, international tax rates, local transportation systems and distribution of goods and services, even health and sanitation levels, all have to be factored in to the equation when discussing purchasing power of a currency, its exchange rate, and their relationship regarding international trade.

What it all means in the long run is that in some countries a national currency equivalent to earning $5/day can enable a peasant to purchase more goods and services than an American earning $50/day, and therefore maintain a roughly equivalent standard of living on less pay. 

The exact opposite reverse is also possible - 50 pesos/day may not even come close to buying what $5 USD/day might buy across the border.

Complicated, to say the least.

Enter the concepts of trade surplus vs trade deficit !

The strength or weakness of a national currency's purchasing power directly affects that currency's exchange rate with regards to international trade, and this factor in turn determines a nation's "balance of trade".

All meaning that "you get a much better deal buying stuff from someone less well off than yourself who is more desperate to sell and is willing to accept less in payment just to get the business".

Other nations will not continue buying Israeli fruit and importing it unless they can receive higher volume and better value for the number of their "dollars" spent.

Therefore, a "weak" currency attracts stronger and wealthier nations whose money "gets more bang for the buck".

HOWEVER, when a nation like Israel succeeds in exporting a larger percentage of its own goods and services than it imports from others, the accountants call it a trade balance surplus, and this results in the value of its unit of currency increasing in value!

Therefore the currency of other nations wanting to import your products has suddenly lost value in the international exchange rate, requiring those nations to have to pay you more next time they want to do business.

A very convoluted system!

The wealthier and stronger a nation becomes, the less sought after are its goods and services by others, because suddenly they find their own money not going as far as it used to go for the same amount of imported goods.

Suddenly the prices have gone up which they have to pay!

Therefore they will shop around and look elsewhere to find the same goods as before but for the same or less money, meaning they no longer want to continue trading with you because you must be paid more than before!

So the government will want to look for ways to "weaken" its currency and therefore be able to do more business once again!     

Confused yet?     

It really does seem a total mess and ball of confusion, but that's sort of how things actually work in regards to international trade (minus about a million other factors like international banking exchange fees, customs, import and export taxes, etc...)     

Better to have a low valued currency if you want to earn money exporting your nation's goods and services.

That way you will be paid in money which is worth more than your own which you can then use to ? become stronger and have a stronger national economy ?  which then starts the whole problem over again in endless cycles?            

[DMAN]

What? I thought that all Jews knew all about finance, banking, and currency, because you know all Jews are rich bankers and it is a well-known fact that they control the world's economy. 

nah everyone knows jews dont work, we pay mexicans to run the economy for us.

[Ari Ben-Canaan]

Re:  "What is the problem w/ a strong Shekel? "

This article is dealing with the "strength" at any given moment of any one nation's national unit of currency.

It is often said by professional economists that "No one actually understands economics."

So considering that is true, here's my feeblest of explanations:

Today all modern nations no longer base their currency on gold or silver, but have established currencies that are "free floating" in respect to all other "free floating" national currencies in use for international trade and business.

This results in a constant flux in the rate of exchange of national currencies:

If your dollar bill is equivalent at the airport or bank exchange counter to one hundred and fifty Israeli shekels, you then find yourself able to tour Israel, find five star hotel accommodations, and buy gifts to bring home which any average Israeli citizen could never dream of affording.

Consider the following oversimplified examples (while keeping in mind that it's not possible to fully explain all of the factors and processes responsible for international currency values and exchange rates).

No doubt you've heard people say things like "In Mexico Americans can retire on a modest pension, afford to live in a luxurious villa, and afford two or three hired servants, all for the cost of a few dollars a day!"

And rather than feel abused and exploited by such a business relationship, Mexican lower class peons are delighted to find work which pays them wages of $1/day working as house servants doing all the cooking and cleaning for American retirees!

This is because in their country, one U.S. dollar has an exchange rate value of 100 pesos [simply a random number I use for easy example], which in Mexico is essentially like a Mexican having one hundred dollars in spending value on local goods and services - enough to move from a cardboard shack to a better dwelling, and provide food and clothing for an entire family.  If they were to work for Mexican employers and be paid an average daily Mexican wage they would only have about $4 or $5 of purchasing power for every 10 hour day worked.  That would be much like Americans working a full week and only ending up with about $25 to live on.

And this comparison is not exact, because the daily exchange rate value of Mexican money in relation to the EU and USD affects how much their paychecks can buy inside Mexico.

Other factors such as Mexico producing and manufacturing far less goods and services for export, international tax rates, local transportation systems and distribution of goods and services, even health and sanitation levels, all have to be factored in to the equation when discussing purchasing power of a currency, its exchange rate, and their relationship regarding international trade.

What it all means in the long run is that in some countries a national currency equivalent to earning $5/day can enable a peasant to purchase more goods and services than an American earning $50/day, and therefore maintain a roughly equivalent standard of living on less pay. 

The exact opposite reverse is also possible - 50 pesos/day may not even come close to buying what $5 USD/day might buy across the border.

Complicated, to say the least.

Enter the concepts of trade surplus vs trade deficit !

The strength or weakness of a national currency's purchasing power directly affects that currency's exchange rate with regards to international trade, and this factor in turn determines a nation's "balance of trade".

All meaning that "you get a much better deal buying stuff from someone less well off than yourself who is more desperate to sell and is willing to accept less in payment just to get the business".

Other nations will not continue buying Israeli fruit and importing it unless they can receive higher volume and better value for the number of their "dollars" spent.

Therefore, a "weak" currency attracts stronger and wealthier nations whose money "gets more bang for the buck".

HOWEVER, when a nation like Israel succeeds in exporting a larger percentage of its own goods and services than it imports from others, the accountants call it a trade balance surplus, and this results in the value of its unit of currency increasing in value!

Therefore the currency of other nations wanting to import your products has suddenly lost value in the international exchange rate, requiring those nations to have to pay you more next time they want to do business.

A very convoluted system!

The wealthier and stronger a nation becomes, the less sought after are its goods and services by others, because suddenly they find their own money not going as far as it used to go for the same amount of imported goods.

Suddenly the prices have gone up which they have to pay!

Therefore they will shop around and look elsewhere to find the same goods as before but for the same or less money, meaning they no longer want to continue trading with you because you must be paid more than before!

So the government will want to look for ways to "weaken" its currency and therefore be able to do more business once again!     

Confused yet?     

It really does seem a total mess and ball of confusion, but that's sort of how things actually work in regards to international trade (minus about a million other factors like international banking exchange fees, customs, import and export taxes, etc...)     

Better to have a low valued currency if you want to earn money exporting your nation's goods and services.

That way you will be paid in money which is worth more than your own which you can then use to ? become stronger and have a stronger national economy ?  which then starts the whole problem over again in endless cycles?            

Entertaining, and educational. 

Gratitude to you, and everyone else who has explained this to me.

[MassuhDGoodName]

Re:  "Gratitude to you, and everyone else who has explained this to me "

You're most welcome, but beware!

Once you're mind actually does "understand" the whole mess, you're in deep trouble!     

Kind'a like those folks who read Kabbala and understand every single word of it!