Dollar Weakens Against Shekel Ahead of US Fed Rate Decision Amid Iran Tensions

The US dollar declined against the Israeli shekel and other major currencies at the start of the Federal Reserve's policy week, reflecting market anticipation of a possible interest rate hike in the US on Wednesday. The dollar fell 0.2% against the shekel, trading above 3.04 shekels, while the euro rose 0.2% to trade above 3.47 shekels. Globally, the dollar index dropped 0.3% to 101.2 points, with the euro and pound gaining against the dollar, and the dollar weakening 0.2% against the Japanese yen.

This market movement coincides with a reduction in fears of escalating conflict in Iran, despite Tehran's announcement that it will continue attacks in the Strait of Hormuz and other areas as long as the US maintains a ceasefire. Israeli economists from Leader, led by Yonatan Katz, highlighted that Israel's tight labor market could drive wage increases and upward pressure on inflation. However, they noted that the recent depreciation of the shekel by 7.6% since early June is unlikely to significantly raise inflation, given the shekel's overall 5.2% appreciation since the start of the year and the ability of many tradable goods to absorb currency fluctuations.

Regarding monetary policy, markets currently assign a 38% probability to a Fed rate hike on Wednesday and a 100% chance of at least one hike by the September 16 meeting, with expectations of two hikes this year. This outlook is expected to influence Bank of Israel policy as well. Under Governor Amir Yaron, Bank of Israel recently cut rates by 25 basis points to 3.5% on July 6, marking the third cut this year, with the next decision due August 1. Economists at Poalim are more cautious, predicting no further rate cuts this year due to inflation forecasts and security concerns weakening the shekel. Meanwhile, Meitav's chief economist Alex Zvezhinsky expects no change in the central bank's direction but still sees potential for rate cuts to 3% this year, emphasizing caution amid ongoing regional uncertainties and noting that previous Iran-related operations did not derail Israel's inflation moderation trend.