Israeli Shekel Drops to Two-Month Low Amid Global and Regional Pressures

The Israeli shekel has weakened against the US dollar, reaching a two-month low as the dollar traded around 3.07 shekels on Thursday. This decline is attributed to a confluence of factors including widening interest rate differentials with the United States, rising bond yields, regional geopolitical tensions, and a strengthening global dollar.

Experts point to several key drivers. Dr. Ilan Gildin of Carney Family Office highlighted the combination of monetary and geopolitical elements. He noted that recent US Federal Reserve interest rate hikes, coupled with market expectations of further tightening, have increased the interest rate gap favoring the dollar and raised hedging costs. Simultaneously, ongoing Houthi attacks in Saudi Arabia and fears of escalating conflict with Iran have increased regional risk premiums, bolstering the dollar's safe-haven status. The dollar is also benefiting globally from high US Treasury yields and anticipation of continued rate increases.

Traditionally, the US stock market's performance has also influenced the shekel. Institutional investors, who allocate significant portions of their portfolios abroad but maintain limited foreign currency exposure, tend to hedge this. When US markets rise, their dollar-denominated assets increase, necessitating dollar sales and shekel purchases, thus strengthening the shekel. Conversely, falling markets lead to shekel weakening.

Yossi Menashe of Altshuler Shaham Financial Services emphasized the impact of Middle East developments on energy, bond, and currency markets. He observed that optimism around US-Iran talks on Friday had lowered oil prices and yields, but a lack of agreement over the weekend led to a reversal, with oil prices and US 10-year Treasury yields rising. This is significant for the Federal Reserve, as energy prices directly affect inflation, and sustained high oil prices could complicate efforts to curb inflation and potentially lead to further interest rate hikes.

Looking ahead, Gildin anticipates continued volatility in the short term, but believes Israel's current account surplus and the Bank of Israel's high foreign exchange reserves may limit the shekel's depreciation potential. A de-escalation in the Persian Gulf could, however, lead to shekel appreciation. Longer-term, the dollar's outlook is becoming less positive due to US political factors and global savings pattern shifts, according to analysts.