Dollar Rises to 3.06 Shekels Ahead of Fed Rate Decision Amid Iran Tensions

The US dollar climbed by 0.3% to 3.06 shekels in the Israeli market ahead of the Federal Reserve's interest rate decision scheduled for this evening. This rise occurred despite a slight global market decline and was accompanied by strong increases in oil prices due to renewed mutual attacks involving Iran. The euro also increased by 0.4% to 3.49 shekels locally, while globally the dollar index fell slightly by 0.1% to 101.3 points, with the euro and pound gaining modestly against the dollar.

Markets largely expect the Fed to keep interest rates unchanged, with a 68.5% probability assigned to this outcome and 31.5% to a rate hike. However, inflation pressures stemming from the Iran conflict and supply bottlenecks in the AI sector could prompt Fed officials to surprise with a rate increase. Fed Chair Kevin Warsh has signaled a shift toward less predictable and less transparent communication compared to recent years, aiming for more robust internal debate on rate decisions.

In June, Fed committee members were split evenly on whether to raise rates this year, with Warsh himself remaining noncommittal. Michael Gapen, Morgan Stanley's chief US economist, described the upcoming Fed meeting as centered on whether the central bank's patience is running out. Gapen expects rates to remain steady but acknowledges the possibility of a hike if Warsh adopts a more hawkish stance to reinforce his credibility in fighting inflation.

Richard de Chazal, macro analyst at William Blair, noted that a rate increase could demonstrate the Fed's seriousness about combating inflation, which remains too high and not moving in the right direction. While some scenarios foresee inflation easing if tensions with Iran subside and rent prices stabilize, risks persist from prolonged oil price increases and inflationary pressures linked to AI investments. De Chazal warned that a surprise rate hike could cause market volatility but might be a price Warsh is willing to pay to restore the Fed's anti-inflation credibility ahead of a likely September hike.