US-Iran Tensions Boost Dollar Above 3.02 Shekels Amid Inflation Data Anticipation
The US dollar strengthened in both global and Israeli markets at the start of the week, driven by escalating tensions in Iran and ahead of upcoming inflation data releases in the US and Israel. The US Central Command (CENTCOM) announced a new wave of strikes across Iran following Iranian missile launches targeting ships in the Strait of Hormuz, which has restricted freedom of navigation in the strategic waterway. This security deterioration has pushed oil prices higher, contributing to a 0.5% rise in the dollar, which traded above 3.02 shekels. The euro also gained 0.5% to around 3.45 shekels, while globally the dollar index rose 0.2% to 101.1 points amid slight weakening of the euro and pound against the dollar.
Market analyst Tony Sycamore from IG Sydney attributed the dollar's strength primarily to rising crude oil prices, which reignite concerns about further interest rate hikes if energy costs continue to climb. Inflation data for June is expected to show a slight decrease or stabilization, influenced by seasonal drops in fruit, vegetable, clothing, and fuel prices, alongside moderate housing cost increases, according to economists at Leader, led by Yonatan Katz. They also noted a moderate rise in airfares in dollar terms, potentially surprising markets upward.
Bank Hapoalim economists highlighted that without the shekel's appreciation, inflation might be closer to the upper limit of the Bank of Israel's target, making interest rate cuts unlikely. They emphasized the uncertainty of exchange rate movements, which depend on global stock markets, the tech sector, and Bank of Israel interventions. The impact of exchange rates on inflation is seen as temporary compared to ongoing wage growth risks. They expect global conditions to keep interest rates above 3.0% for an extended period.
Alex Zvezhinsky, chief economist at Meitav, echoed these views, noting that after the Bank of Israel's recent rate cut from 3.75% to 3.50%, markets price rates near 3% in a year, with most cuts expected this year. He suggested that further rate reductions below 3% are less likely now due to weakening sentiment toward the shekel. Despite a roughly 1% depreciation of the shekel against the dollar in the past month, alongside a 4% rise in the S&P 500, he expects exchange rates to be influenced by Israel's security and political developments until elections, limiting the shekel's strengthening potential.
Ahead of the US consumer price index release, Zvezhinsky noted that signs of accelerating inflation, especially core inflation, could increase the likelihood of a rate hike by the Federal Reserve later this month. However, current Fed communications suggest a preference to wait and assess whether inflation trends are temporary.
