Israeli Shekel Hits Two-Month Low Against Dollar Amid Regional Tensions

The Israeli shekel has fallen to a two-month low against the U.S. dollar, with the dollar trading above 3.07 shekels for the first time since July. The Bank of Israel set the representative exchange rate on October 1st at 3.066 shekels per dollar, an increase of 1.088% from the previous day. Several factors are contributing to the shekel's decline, including interest rate differentials between Israel and the U.S., rising bond yields, Middle East tensions, and the general strengthening of the U.S. dollar.

Ilan Gildin, a partner at Karni Family Office, attributes the currency movement to a combination of monetary and geopolitical factors. He noted that recent interest rate hikes by the U.S. Federal Reserve and expectations of further tightening have widened the interest rate gap in favor of the dollar, while also increasing the cost of currency hedging. Geopolitical events, such as Houthi attacks on Saudi Arabia and concerns about escalation with Iran, are increasing regional risk premiums and driving demand for the dollar as a safe-haven asset.

Global market conditions are also impacting the shekel. Yossi Menashe, founder and CEO of Altshuler Shaham Financial Services, explained that events in the Middle East are spilling over from energy markets to bond and currency markets. He pointed to rising oil prices and U.S. Treasury yields following the breakdown of U.S.-Iran negotiations, with 10-year U.S. Treasury yields returning to 5.21%. The Fed's recent rate increase to 4% further widens the gap with Israel's rates.

The dollar's strength is not limited to its performance against the shekel; the DXY index, which tracks the dollar against major world currencies, has also surpassed 101 points, a two-month high. Gildin anticipates continued volatility in the short term. However, he also highlighted that Israel's current account surplus and the Bank of Israel's substantial foreign exchange reserves act as a buffer against further shekel depreciation. A de-escalation of tensions in the Persian Gulf could potentially lead to a strengthening of the Israeli currency.