Israeli central banker says world must accept a weaker dollar


By Daniel Bases
Thursday, December 3, 2009

NEW YORK -- Bank of Israel Governor Stanley Fischer said on Thursday the world has to accept a weaker U.S. dollar in order to ensure the global economy recovers soundly.

"We also have to realize, what is hard to get across, there has to be a global rebalancing. Either the U.S. runs a very long period of recession, which is a really bad idea, or the dollar has to weaken, so that balance of payments can be straightened out," Fischer said in response to a question during a business breakfast in New York.

"So we have got to accept, as do other people, there has to be appreciation vis-a-vis the American dollar. Most people have kind of accepted that. It is just that when it gets out of line that people get nervous," he said.

The Israeli shekel has recently strengthened against the U.S. dollar, trading at around 3.7750 per greenback. In October it hit its best levels in 10 months, trading as strong as 3.67 per U.S. dollar.

In the August through October period the central was intervening heavily in order to stop the shekel from appreciating rapidly against the greenback which would give relief to Israeli exports.

The U.S. dollar index, which measures the greenback against a basket of major trading-partner currencies, has fallen roughly 16.75 percent since it peaked in early March of this year when global markets hit bottom and investors were seeking a safe haven.

Fischer acknowledged the strong economic connection with the United States and its importance for the global economy but cautioned that heavily export-oriented countries have to move away from relying on the United States to buy their goods and services.

"So I think we've all got to accept the fact that the dollar is likely to be weaker and our currencies relative to the dollar are going to be stronger. The U.S. has to reduce its imports ... or we won't get a prosperous global economy," he said.

"You have at one end the Chinese just not budging. At the other end the Brazilians have massive appreciation ... trying to use capital controls and various things," he said in reference to measures put in place to limit the real's rise.

On the issue of inflation, which he reiterated is likely to rise above the current top end of its 1-3 percent target range in the coming months, Fischer said he would not be a buyer of gold.

As recently as Nov. 23, the central bank increased its key lending rate by a quarter of a percentage point to 1 percent, a level it said was still "accommodative" and would support further economic recovery.

Still, given the rising inflation pressures, he said he was not interested in making a move similar to that of India's central bank, which spent $6.7 billion in early November to buy 200 tonnes of gold from the International Monetary Fund.

Spot gold prices touched another record high on Thursday, rising to $1,226.10 before slipping back to $1,214.

"If you really think that the future is high inflation in the world economy, then you hold gold. I don't think that is the future. I don't see us in a high-inflation environment. Without committing, I don't think we are going into gold any time soon," he said.

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