Bank of Israel Governor Stanley Fischer is to hold a press conference this morning, during which he will explain the bank's interest rate policy and discuss the nascent worldwide currency war. Later in the week he will fly to Washington, D.C., for the annual meetings of the International Monetary Fund and the World Bank Group, next weekend. Officials at the Bank of Israel say the currency war is expected to top the agenda at the meetings.

Open gallery view Stanley Fischer. Credit: Tali Mayer

Last week Israel's central bank continued its dollar-purchasing policy, in an effort to rein in the rise of the shekel, buying about $300 million on Friday alone after its pre-holiday acquisition, on Tuesday, of tens of millions of dollars. Despite these measures, the dollar fell on Friday to NIS 3.645, its lowest level in two years. Last week, the U.S. currency slipped 1.6% against the shekel.

Bank of Israel officials said last week that Israel was being allowed to interfere in the foreign currency market to shore up the shekel because in international terms its economy is small. But with the advent of a global currency war and talk of a trade war to come, that could change.

On Monday, Brazil's Finance Minister, Guido Mantega, said things no high-ranking economic figure had yet dared to utter in public. "We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness," Mantega said.

This was countered the following day by IMF managing director Dominique Strauss-Kahn, who after acknowledging growing concern about the potential results of intervention by various countries to weaken their currencies added, "I don't feel today there is a big risk of currency war," because everyone recognizes the gravity of the consequences.

As global trade shrank during the past few years, due to the worldwide economic crisis, countries began buying up dollars, in order to bring about a devaluation in their own currency, so as to make exports more attractive while disincentivizing imports. The states that don't play the game stand to lose, as their exports become more expensive and their markets are flooded with cheap imports.

The Bank of Israel was a pioneer among central banks when it began buying up dollars about two and a half years ago. Recently it's been joined by counterparts in a dozen states, including Japan, South Korea, Taiwan, Singapore, Brazil, Argentina, Peru, Colombia and Switzerland.

Now Britain, the United States and European Union member states are considering similar interventions. If that happens, the Bank of Israel is likely to continue to buy dollars in order to protect Israeli exporters.

Most of the global fury over currency manipulation is focused on China. Its currency, the yuan, is generally considered to be undervalued by about 40%.

Treasury officials said this weekend they expect Fischer to use today's press briefing as an opportunity to attack Finance Minister Yuval Steinitz, for his recent criticism of the central bank's policies, including Fischer's decision to raise interest rates.

Finance Ministry officials oppose the central bank's currency intervention, pointing out that despite the $40 billion or so that the Bank of Israel has purchased in the past two and a half years, the exchange rate is pretty much where it was two years ago. In addition, they say, the BoI is paying for those dollars by issuing high-interest short-term securities, while its foreign currency reserves earn little interest, which costs the Israeli economy billions of dollars every year.