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The Bank of Israel has a big task on its hands.

The shekel has pulled back slightly from last week’s more than two-year high against the dollar, after the central bank reaffirmed its commitment to trying to slow the currency’s appreciation. But the challenge facing the bank may be even greater than the dollar move suggests, with the shekel hovering near its strongest level on record on a trade-weighted basis.

The BoI’s foreign currency reserves swelled to more than $102bn in February, as it continued what began as “temporary” interventions in the forex market in 2008.

The bank’s deputy governor Nadine Baudot-Trajtenberg said last week that the currency has become more strongly overvalued “in the past few months“, but the currency has been steadily appreciating for almost a decade, encouraged by strong economic growth and lower energy imports.

The nominal effective exchange rate, an index reflecting the relative price of the shekel against a basket of peers, weighted for their importance to foreign trade, has strengthened in nine of the last 12 years, and last week hit its highest level since records began.

The shekel has lost 1.7 per cent against the dollar since last week’s high, but has benefited from a wider recovery in the buck. The trade-weighted rate, in contrast, has not weakened as much, falling only 1.2 per cent.

Israel’s powerful export lobby is likely to call for further measures to halt the shekel’s rally, but analysts are sceptical the bank will be able to have much impact.

Citi’s Luis Costa noted earlier this week that Israel’s government bonds are close to being added to the World Government Bond Index, a move that will likely prompt a further inflow of foreign money from index-tracking funds, encouraging the shekel’s appreciation.

In an emergency meeting with manufacturers on Monday, Israel’s finance minister Moshe Kahlon promised that the government “will not abandon the exporters” but, in a tacit admission of the bank’s limited influence, called for measures to help manufacturers through a productivity drive, rather than currency manipulation.

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