Investors Eye Dollar Rise Through Dollar-Denominated Money Market Funds in Israel

The Israeli foreign exchange market has experienced significant volatility recently, with the US dollar hitting a 30-year low against the shekel earlier this year at around 2.8 shekels before gradually recovering to nearly 3.1 shekels. However, since early August, the dollar has weakened again, trading below the psychological threshold of 3 shekels. Despite the challenges in predicting currency trends due to numerous influencing factors, some investors believe the dollar has bottomed out and may rebound to levels between 3.20 and 3.30 shekels or higher.

For those anticipating a dollar rise and seeking exposure to the currency, dollar-denominated money market funds have come back into focus. These funds invest in short-term, low-credit-risk assets such as US Treasury bills, bank deposits, and highly rated corporate bonds. Similar to shekel money market funds that aim to yield returns comparable to the Bank of Israel's interest rate, dollar funds target returns aligned with the US Federal Reserve's interest rate.

Two main investment options exist in the Israeli market: one is a dollar money market fund purchased and redeemed directly in US dollars, suitable for investors already holding dollar accounts who want to earn ongoing returns without currency conversion. The other is a dollar money market fund traded in shekels, where assets are dollar-linked. Returns in this option depend on the Fed rate plus or minus exchange rate fluctuations against the shekel, meaning a strengthening dollar increases shekel returns, while further weakening reduces them.

Investors are advised to carefully review each fund's policy, management fees, and tax implications before investing. The recent currency fluctuations and the potential dollar recovery have made these funds an attractive option for those looking to benefit from expected changes in the dollar-shekel exchange rate.