Dollar Surges Against Shekel as Markets Brace for Fed Rate Hike

The Israeli shekel weakened significantly at the start of the new year, with the dollar rising 0.8% to trade above 3.05 shekels. The euro also saw a modest increase of 0.2%, trading above 3.52 shekels. This comes ahead of a week filled with crucial monetary policy decisions, including the release of August inflation data in Israel on Tuesday.

Globally, the dollar index climbed 0.5% against a basket of major currencies, reaching 99.6 points. The euro fell 0.5% to trade above $1.15, and the British pound dropped 0.3% to below $1.35. In Japan, the dollar appreciated by 0.8% to 154.7 yen, alongside sharp increases in oil prices.

The US Federal Reserve is set to announce its interest rate decision on Wednesday. The market is currently pricing in an 86% probability of a 0.25% rate hike, bringing the benchmark rate from 3.75% to 4%, with further increases anticipated later in the year. This would be the first rate hike in five meetings.

On Thursday, the Bank of England will announce its interest rate decision. Forecasts suggest the rate will remain unchanged at 3.75%, though a significant minority may support a hike. On Friday, the Bank of Japan is expected to raise its interest rate due to rising inflation, which stood at 1.9% in July. August inflation data will be released concurrently.

Shane Oliver, Chief Economist at AMP, noted that the Fed might consider waiting to raise rates, but this is complicated by the timing of its October meeting, which falls just before US midterm elections. He suggested a delay until December might be too long. Analysts at ING believe a rate hike would bolster the Fed's credibility and ease pressure on currency swaps, but cautioned against excessive dollar strengthening, viewing it as a policy adjustment rather than the start of a new hiking cycle.