Commentary / 13 reasons the dollar will reach NIS 5 this year

[salahedeen]

Here are 13 reasons to buy the dollar versus the shekel.
1. Hamas' rise to power in the Palestinian Authority destabilizes the region. Until Hamas disarms and abolishes the clause in its charter calling for Israel's destruction, it falls into the category of a terror organization, and cannot be expected to pursue the peace process. Nor can unilateral withdrawals by Israel be expected. Some security analysts, including the chief of staff, think the region's security situation could deteriorate badly this year, and that terrorism could resume. There could even be a third intifada. Remember in that context that Hamas is an extremist movement. Even if it wears the guise of a moderate, mistrust in it will remain.

2. Depressed investments - Hamas' surprise victory could depress foreign investment in Israel. Several companies have already decided to suspend investment plans here, at least until the situation clears up. Companies already invested could decide to abort talks on expansion. As for joint projects between Israelis and Palestinians, they're on the back burner for an indefinite period of time.
3. Response of foreign investors in Israeli stocks - They could reroute their money to other markets: note Deutsche Bank?s downgrading of Israel to Underweight. Foreigners presently own about 15 percent of the stocks listed for trade, and about half of that is believed to be short-term.

4. Tax parity - The reform equalizing tax on Israeli and foreign securities came into force on January 1, 2005. The results are gaining momentum. Institutional and private investors alike are exporting more and more of their investments to markets elsewhere in the world. I believe the day is close, a matter of a few years, when overseas assets will comprise 30 percent of the Israeli portfolio.

5. U.S. interest rates can be expected to continue rising even under the new chairman, Ben Bernanke. We can expect him to raise the funds rate to 5 percent.

6. The interest rate gap between Israel and the U.S. is 0.25 percent, which encourages Israeli investors to diversify their investments between shekels and dollars. I believe that only a gap of 1 percent or more would encourage investment in the shekel instead of in the dollar.

7. The pension fund reforms diverted money from designated treasury bonds to the capital market, and will ultimately expedite investment outside Israel, in part because of the undersupply of shekel bonds. Also, bond-oriented mutual funds may invest more in the dollar if negative momentum builds up in local treasuries. Unlike shekel-vehicle mutual funds, the bond-oriented ones have no obligation to invest only in the shekel.

8. Technical analysis shows the dollar trend is roaring along; despite strong resistance at NIS 4.65, there is a good chance the dollar will reach NIS 5 by the year's end.

9. The inflation cascade - The appreciation of the dollar in and of itself could accelerate its rise because of its impact on inflation. The dollar rises, inflation rises, requiring the Bank of Israel to raise domestic interest rates, which depresses share prices, which depresses foreign investment in stocks and leads them to convert shekels into dollars, which raises the dollar some more, and so on.

10. Iran and Syria - The Iranian bomb is costing sleep throughout Jerusalem and Washington. There is a scenario of escalation, this year, that could destabilize the entire Middle East. The rise of Hamas just thickens the pudding. Fifty-seven percent of Americans support blocking the Iranian nuclear program, despite the majority that supports leaving Iraq. If Iran's nuclear facilities are attacked, expect Katyushas raining down on the Galilee and terrorism in the heart of Israel. The probability of this scenario is not vanishingly small.

11. The corruption index - Israel tends to disregard the global corruption index and even used to boast that we're roughly as rotten as the U.S. Now the situation has grown dreadful. We dropped 12 places since 2001 to 28th, which is 11 places below the U.S. In August the World Bank wrote that corruption in Israel is among the worst in the West and that our government is unstable, inefficient, shrugs at responsibility and has a lousy record on enforcing laws. Then there's the police's own estimate of eight nationwide and 40 local crime gangs operating here. Now organized crime has even reached the stock market.

12. Canceling the diagonal band - In fact we've already forgotten that band, but we never have lived the scenario of the dollar soaring unfettered against the shekel. Our forex market is completely free and is vulnerable to violent fluctuation, just like other markets.

13. Tax exemptions - Investment in the dollar (or any other currency) is not taxable when it rises, nor can losses offset your tax bill. Tax is on interest only, not on linkage. When the dollar is rising, nonpayment of tax on its rise creates an incentive to invest in it versus the shekel.

In summation, my recommendation is to hold at least 30 percent in bonds linked to the dollar, with average durations of a week to a year, yielding about 4 percent a year, gross. Not invested in dollars yet? I recommend diversifying your entry over time because of the rising volatility of the dollar.

The author is the CEO of New Business Center Alony Investment House, which engages mainly in portfolio management in Israel and the U.S. for small and big clients.

[forexpert]

والله فكره جيده بس اظن ان كل هذه العوامل قد اثرت بالفعل على الشيكل الاسرائيلى وهبط سعره...لو كنت اعرف قبل ان يحدث ذلك لكنت بعت اشتريت دولار وبعت الشيكل الكلب الله يلعنه ويلعن اصحابه...مشكور اخى صلاح الدين