Dollar Strengthens Against Shekel Due to Global Uncertainty and Bank of Israel Policy Shift
Translated & summarized from Globes by baba
The US dollar has strengthened against the Israeli shekel, reaching near 3.2 shekels per dollar, driven by global uncertainty and a policy shift by the Bank of Israel. The central bank's decision to cut interest rates and purchase foreign currency, alongside global rate hikes, has weakened the shekel. The dollar's safe-haven status is also a major factor. Hedging costs have quadrupled, impacting investor behavior, with expectations pointing to a continued weaker shekel in the low 3s.
The story in 6 lines · by baba
- The US dollar strengthened against the Israeli shekel, reaching close to 3.2 shekels.
- The Bank of Israel's decision to cut interest rates and buy foreign currency weakened the shekel.
- Global central banks raising interest rates further pressured the shekel downwards.
- The dollar's role as a safe-haven currency is amplified by geopolitical uncertainty.
- Foreign currency hedging costs have quadrupled, making it less attractive for investors.
- Market expectations predict the shekel to remain in the low 3s against the dollar.
The Israeli shekel has experienced significant fluctuations against the US dollar recently, moving from around 2.8 shekels to the dollar in May-June to closer to 3.2 currently. Kobi Levi, Head of Market Strategies Desk at Bank Leumi, attributes the dollar's recent strengthening to a combination of global factors and a policy shift by the Bank of Israel. Despite underlying strengths in the Israeli economy, such as export surpluses, a growing economy, low inflation relative to the world, and a contained deficit, external forces have impacted the currency.
A key change occurred in late May when the Bank of Israel began lowering interest rates and purchasing foreign currency, injecting approximately $2 billion into the market within a week. This move, coupled with interest rate hikes by global central banks like the US Federal Reserve, created downward pressure on the shekel, benefiting exporters. Levi noted that while the Bank of Israel maintained stable rates while others lowered them, its subsequent rate cuts amplified the weakening effect on the shekel.
Beyond monetary policy, Levi highlighted the dollar's role as a safe-haven currency, particularly in times of political, geopolitical, and financial uncertainty. The Middle East's regional instability has further bolstered the dollar's appeal. He asserted that the dollar remains the primary global reserve and trade currency, with no immediate alternatives capable of absorbing its liquidity, despite challenges from gold and cryptocurrency.
The cost of hedging foreign currency exposure has also surged. In the first half of the year, hedging cost about 0.5%, but this has risen to over 2%, a fourfold increase in one quarter. This makes hedging less attractive if the expected appreciation of the shekel is less than the hedging cost. Institutional investors have reduced their dollar hedging activities accordingly.
Looking ahead, market expectations, based on a Central Bureau of Statistics survey, anticipate the shekel-dollar exchange rate to hover around 3.1 in the next three months, suggesting a continued trend of a weaker shekel, potentially in the low 3s. Significant upward pressure on the shekel could arise from stock market declines or geopolitical instability. On a more optimistic note, Levi suggested that a potential Israeli-Saudi agreement, driven by security cooperation and technology exports, could be a significant macroeconomic event, though he deemed its probability low.
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