By Tal Barak
Nov. 18 (Bloomberg) -- Leah and Dov Yaakoby got a surprise wedding gift when their landlord offered a month's free rent to renew the lease on an apartment in the suburbs of Haifa in northern Israel.
The catch was they would have to start paying rent set in shekels, not dollars, the currency of choice in Israel for a generation. The landlord wanted the change because the shekel's 30 percent appreciation since October 2005 meant the $525 monthly payment, valued at 2,426 shekels when they moved in, was worth 1,844 shekels by their wedding day in March.
``There was such a fluctuation in the currency that he ended up owing us money,'' said Leah, a 27-year-old writer of online software guides. ``Getting a one-month break on the rent was really great, especially in the year when we got married.''
While Iran threatens to destroy Israel, militants in the Hamas-controlled Gaza Strip fire rockets into the country and corruption scandals forced the prime minister to resign, the shekel increasingly looks like a hard currency. Since Stanley Fischer, the former International Monetary Fund deputy director, became the Bank of Israel governor in May 2005, the shekel strengthened 12 percent against the dollar and the Swiss franc, 13 percent versus the euro, 3.1 percent against the yen and 41 percent compared with the British pound.
``The shekel is the safest asset in Europe, the Middle East and Africa,'' Merrill Lynch & Co. strategist Benoit Anne in London wrote in an Oct. 22 report. ``The shekel presents some defensive characteristics, which has served the currency relatively well at a time of several global risk conditions.'' Merrill set its ``medium-term'' fair value for the shekel at 3.37 to the dollar.
Gains Predicted
The shekel traded at 3.92 on Nov. 17. Merrill's prediction would amount to 16 percent gain in the next two to three years. Analysts in a Bloomberg survey said the currency will reach 3.80 by the end of 2009.
Investors are gaining confidence after Israel's economy grew an average of 6 percent in the past four years and inflation slowed to an annualized rate of 5.5 percent last month from as high as 486 percent in November 1984.
Israel's $206 billion economy will expand 4.5 percent in 2008, according to Central Bureau of Statistics estimates. That's faster than the 3.7 percent forecast for the world economy by the IMF in Washington. U.S. gross domestic product contracted at a 0.3 percent rate last quarter, the biggest decline since 2001, and will expand 1.4 percent this year, based on the mean estimate in a Bloomberg survey of 75 economists.
Holding Up
Israel's economy is holding up better than some other Middle Eastern nations. Dubai may need support from its neighboring emirates to finance borrowing that paid for development of the world's tallest building, created palm tree- shaped islands and bought stakes in banks worldwide, Moody's Investors Service said in an Oct. 13 report.
Kuwait had to prop up its banking system as the end of the oil boom weighed on the region's stock and real-estate markets. The Kuwait Stock Exchange suspended trading Nov. 13 and the United Arab Emirates said in October it would guarantee deposits of all local banks and large foreign banks.
Israel avoided the worst of the damage from the credit- market seizure. The central bank said last month there was ``no sign'' of a domestic cash squeeze, with lending among financial institutions taking place ``as usual.''
Bernanke's Thesis
Fischer, 65, lowered the Bank of Israel's main interest rate to 3 percent from a high this year of 4.25 percent, including an unscheduled cut of half a percentage point on Nov. 11. Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc, called the latest reduction an effort ``to get ahead of the curve.''
Fischer, the former Citigroup Inc. vice chairman who advised Federal Reserve Chairman Ben S. Bernanke on his doctoral thesis at the Massachusetts Institute of Technology in Cambridge, helped to steer the economy as the sudden increase in borrowing costs battered the world's biggest financial companies with $967 billion of losses since the start of 2007. The IMF warned Nov. 6 that the U.S., Europe and Japan are headed for the first simultaneous recessions since World War II.
The shekel also benefited as Israelis who invested overseas brought money home. They were net sellers of 396 million shekels ($101 million) of foreign securities in the first nine months of the year, after investing about 4 billion shekels abroad in 2007, according to the Bank of Israel.
Strangling Profits
``The shekel has held up incredibly well,'' said Neil Corney, the treasurer at the Tel Aviv unit of Citigroup, the world's fourth-biggest foreign-exchange trader, which advises investors to add the shekel to their holdings. ``There's a lot of repatriation of funds back to Israel and investors have used the shekel as a hedge against other currencies as growth is higher than in other countries.''
The shekel's gains are strangling profit for Israel's exporters, which account for 44 percent of GDP.
Aladdin Knowledge Systems Ltd., a Petah Tikvah-based computer security company that gets 95 percent of its sales from overseas, cut earnings forecasts on July 2, citing the shekel's appreciation. Haifa-based Elbit Systems Ltd., Israel's biggest non-state defense company, is shifting manufacturing outside the country to hedge against the dollar's weakness.
The central bank said July 10 it would quadruple daily foreign-exchange purchases to curb the currency's strength. It agreed to buy $100 million a day and increase holdings to between $35 billion and $40 billion during the next two years, from about $28 billion. The shekel has fallen 15 percent versus the dollar since then.
Shattered by Inflation
Confidence in the shekel was shattered by inflation after the 1973 Yom Kippur War and the 1983 bailout of the nation's banks. Government debt swelled to more than a quarter of GDP and consumer prices increased at a rate of at least 100 percent for 26 straight quarters.
The U.S. currency strengthened 490 percent against the shekel in 1984 as consumer prices rose 445 percent. Israelis adopted the dollar for transactions from rent to catering bills.
In 2005, 90 percent of rental contracts were pegged to the U.S. currency, according to the Central Bureau of Statistics. Now, it's 20 percent.
``Everyone is making the move to the shekel, or setting a minimum and maximum range for the exchange rate,'' said Leslie Henan, a Tel Aviv-based attorney who advises on real estate deals and started doing business in the shekel this year. ``I don't want to take this risk of currency fluctuation on my business.''
Israel's economic comeback has overshadowed politics.
Terrorism Concern
Iran President Mahmoud Ahmadinejad said in 2005 that Israel should be ``wiped off the map'' and refuses to halt his nation's nuclear activities. Israeli strikes on Gaza in the past week and rocket attacks by Palestinians are threatening a five-month cease fire. Ehud Olmert was forced to step down as prime minister in September after six corruption probes in 33 months. Israeli political parties tentatively agreed to hold national elections on Feb. 10.
``This is a country that has always suffered from terrorist attacks and there's a whole generation that grew up on the concept of a weakening shekel,'' said Adam Reuter, chief executive officer of Rehovot-based Financial Immunities, which advises technology companies and the Israeli Export Institute on currencies. ``But now the public doesn't believe in the dollar anymore.''
For the Yaakobys, linking to the shekel provided extra benefits.
``I bought a ticket to see my friends in Hawaii and then was trying to cancel it because I thought I wouldn't be able to pay,'' said Leah. ``Then I realized I had this month free of rent so I could afford the trip.''
To contact the reporter on this story: Tal Barak in Tel Aviv at tbarak@bloomberg.net
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