Shekel May Fall 7 Percent by Year-End, Citigroup Says

By Tal Barak

Aug. 6 (Bloomberg) -- The shekel may fall 7 percent against the dollar by year-end as Israel's economic growth slows, according to Citigroup Capital Markets Ltd.

The currency will slide to 3.80 per dollar, from about 3.55 today, Ali Al-Eyd, an economist in London at Citigroup, the world's third-largest currency trader, wrote in an e-mailed report today. Citigroup's year-end prediction was 3.60 per dollar as recently as July 10. The median of 12 analyst and strategist forecasts compiled by Bloomberg is for the shekel to end the year at 3.43 per dollar.

The shekel lost 6.3 percent against the dollar since the Bank of Israel said July 10 it will buy $100 million a day to limit currency gains that are hurting exports. The economy will grow 4.2 percent this year, the slowest pace since 2003, according to the central bank. The bank's state-of-the economy index fell in June for the first time in more than three years.

``The combination of weaker growth as well as recommitment to the foreign currency-repurchase program should help to maintain a weaker shekel going forward,'' Al-Eyd said in a telephone interview.

The shekel traded at 3.5380 per dollar as of 4:05 p.m. in Tel Aviv today, from 3.5475 yesterday. The currency was the worst performer against the dollar in July among 11 emerging- market counterparts, losing 4 percent.

Currency Purchases

The Bank of Israel plans to increase foreign-currency holdings to between $35 billion and $40 billion in the next two years, from $28 billion. Policy makers will decide whether to buy more dollars when the bank completes the purchase of $10 billion in two months, Haaretz newspaper cited Deputy Governor Zvi Eckstein as saying yesterday.

``Eckstein's comments point to a renewal of the foreign exchange-purchase program as a means to maintain the currency around current levels to the U.S. dollar,'' Al-Eyd wrote.

The Bank of Israel, led by Governor Stanley Fischer, raised its benchmark interest rate by a quarter-point to 4 percent on July 28, the third increase since May. Inflation has exceeded the government's 3 percent ceiling for seven months.

To contact the reporter on this story: Tal Barak in Tel Aviv at tbarak@bloomberg.net