Dollar Surges Past 3.05 Shekels Amid Global and Regional Pressures

The Israeli shekel has weakened against the U.S. dollar, with the exchange rate surpassing 3.05 shekels per dollar at the start of the week. This marks a roughly 2.5% increase from late August when the dollar traded around 2.97 shekels. Despite this recent rise, the shekel remains relatively strong year-to-date, down approximately 4% since the beginning of the year and 9% compared to the same period last year.

The current depreciation is largely driven by international factors. The U.S. dollar index is near a two-month high, and the dollar is heading for its strongest month since June. This trend is influenced by shifting interest rate expectations, with rising oil prices (approaching $106 per barrel) and high U.S. Treasury yields (around 5.2%) fueling concerns about persistent inflation and the possibility of further interest rate hikes by the U.S. Federal Reserve.

Regional tensions are also contributing to the shekel's weakness. Any perceived distancing from the U.S.-Iran agreement escalates energy prices and increases demand for the dollar as a safe-haven asset. This dual effect of a stronger global dollar and increased local risk premium negatively impacts the shekel.

However, the shekel benefits from underlying strengths, including high-tech exports, foreign currency inflows, and the activity of institutional investors. When Wall Street rises, Israeli institutions often sell dollars to hedge their increased overseas investments, a mechanism that has historically supported the shekel around the 3-shekel level.

The interest rate differential currently favors the dollar. The Bank of Israel recently lowered its interest rate to 3.25%, the fifth reduction in less than a year, while the Federal Reserve has raised its rates to a range of 3.75%-4%. Bank of America has previously projected the dollar could reach 3.10 shekels.

The upcoming week holds potential to shift the trend. Key U.S. economic indicators, including the PCE index and Friday's employment report, will influence the Federal Reserve's monetary policy decisions. Stronger U.S. data combined with high oil prices would likely support the dollar, whereas a de-escalation of tensions with Iran, falling yields, and a rebound on Wall Street could help the shekel regain strength.