Shekel Weakens for Eighth Straight Day as Dollar Rises

The shekel continues to weaken today, Wednesday, and is already trading at 2.97, not far from returning to the 3.0 level. Since the dollar hit its low against the shekel at the start of the month, 2.77 shekels, this is already the eighth consecutive day of shekel weakness, the longest such streak ever.

The main factor is the declines on Wall Street. Institutional investors maintain a fixed average exposure to foreign currency, about 20%. Since a very large share of the public’s money is invested in stocks abroad, an automatic mechanism is created, when U.S. markets rise, the value of the institutions’ dollar-denominated holdings jumps, threatening to push their foreign-exchange exposure above the target they set. To rebalance and keep exposure stable at about 20%, the institutions are forced to sell dollars in the market. The equation is this, each 1% rise in the main Wall Street indices requires the institutions, according to estimates, to sell about $2 billion to hedge the risk, and vice versa. When the U.S. stock market rose sharply, selling pressure flooded the local market with dollars. In recent days the trend has reversed, and they are now forced to buy dollars.

The weakness also comes after, for the first time since 2022, the Bank of Israel returned to buying dollars. This week it was revealed that the bank intervened directly in the foreign exchange market during May to the tune of $800 million, and market estimates are that the purchases continued into June. To this must be added the speech by Bank of Israel Governor Prof. Amir Yaron at the Eli Hurvitz Conference on Economy. The governor hinted that if the inflation environment falls and approaches the lower bound, 1%, due to the shekel’s strengthening, that would justify a more expansionary monetary policy at a faster pace. The market immediately responded to the signal, and on the same day the shekel began weakening against the dollar. It later emerged that at the time of the speech, the Bank of Israel had already intervened in practice.

There are also other factors, of course, such as the rise in Israel’s risk premium following the escalation on the Lebanese border, the American strike in Iran, and the launches from Tehran toward Gulf states.

The U.S. dollar itself is also rising globally, mainly because of rising expected inflation there, and some are even forecasting that interest rates will rise, which is pushing up bond yields. Today the focus is on the inflation data to be published over the next two days, the Consumer Price Index, CPI, today and the Producer Price Index, PPI. U.S. inflation is expected to cross 4% for the first time in three years, and this development could affect the economy and markets for the rest of the year. In this way, the U.S. bond market is sending a clear message to the new Fed chairman, Kevin Warsh, interest rates are still not high enough.

In the United States, U.S. government bond yields fell slightly, and the yield on the 10-year bond declined by four basis points to 4.53%. The yield on the 2-year bond, considered more sensitive to short-term rate changes, is already at 4.13%. This is a yield considered most sensitive to interest-rate expectations. The yield jumped to a more than one-year high, while the Fed’s official interest-rate range currently stands at 3.5% to 3.75%. In other words, the bond market is already pricing in a higher rate than the one in place today. The move intensified especially after the stronger-than-expected employment report, which showed that the U.S. labor market remains solid despite high interest rates. Following the data, traders began pricing in a quarter-point rate hike as early as October.

The situation creates a challenge for Warsh. Before taking office, he hinted more than once that monetary policy is already restricting economic activity and that there is room for easing in the future. He now faces a bond market signaling exactly the opposite, that the Fed may be behind the curve in the fight against inflation. The focus is now on the inflation data to be published today.