Dollar Hits Six-Month High Against Shekel Amid Global Turmoil

The dollar has surged against the Israeli shekel in recent days, trading around 3.10 shekels, its highest level in six months. This sharp appreciation, marking a 10% increase since May, is attributed to a combination of concerning U.S. inflation data, a global stock market downturn, and structural shifts within the Israeli economy. The euro has also strengthened, trading near 3.47 shekels.

The immediate trigger for the currency market volatility was the release of U.S. consumer price index data, which exceeded expectations and indicated that price pressures extend beyond energy costs. Yossi Menashe, founder and co-CEO of Altshuler Shaham Financial Services, explained that the market reaction reflects a tension between inflationary pressures and fears of impacting economic growth. While the September U.S. annual inflation rate of 3.7% initially fueled expectations of interest rate hikes, leading to a stronger dollar and a rise in ten-year Treasury yields, subsequent stock market declines and growth concerns caused yields to fall and the dollar to retreat from its peak. However, Menashe noted that this global dollar pullback did not erase its gains against the shekel, which were also influenced by local factors and regional risks.

Shmuel Katsabian, chief strategist at Discount, linked the shekel's weakness directly to the global stock market slump, stating that Nasdaq futures have fallen about 5% since October 6, coinciding with a 1.7% weakening of the shekel against the dollar. He observed the familiar pattern of shekel depreciation during global stock market declines, noting it is occurring with slightly greater intensity than usual. Institutional investors and other market participants are buying dollars and selling shekels amid falling global stocks, a trend that is currently playing out. Katsabian emphasized that no unusual macroeconomic data has been released locally, and Israel's risk premium has remained relatively stable.

Beyond the global storm, Victor Bahar, chief economist at Bank Hapoalim, identified deeper changes in the Israeli economy contributing to the shekel's depreciation. He explained that the dollar typically strengthens during periods of economic and political uncertainty, and Israel has faced additional domestic political uncertainty leading up to elections. Furthermore, Bahar pointed to a fundamental shift: Israel, historically characterized by current account surpluses, has recorded small deficits in the last two quarters. While significant direct investments still support the economy, this weakening of a key support factor for the shekel over the past two decades is increasing currency market volatility and amplifying reactions to uncertainty.

In this environment, investment managers are seeking companies that can profit from the trend. Shi Egozi, managing partner at the Long Road hedge fund, noted the difficulty in predicting dollar-shekel movements but focuses on generating excess returns from macroeconomic changes and hedging portfolios against currency volatility. Egozi challenged the notion that only exporters benefit from a stronger dollar, explaining that Israeli IT companies selling dollar-denominated licenses and hardware, investment firms with significant dollar revenues, and even real estate companies could benefit. He also downplayed concerns for traditional losers like fashion companies, citing their long inventory cycles and hedging strategies that may mitigate the impact of a weaker shekel.