The shekel continues to appreciate as the dollar falls against other currencies. Today’s shekel-dollar representative rate was set at NIS 3.98, down 0.82% from Friday’s rate. This is the third time in the past decade that the shekel-dollar exchange rate has reached this level: once four months ago, and the other time eight years ago.
The dollar’s weakness has little to do with local economic or currency factors, but should be considered in the global context. It involves a process of many years of rapid global growth and the emergence of new economies, which are grabbing an increasing share of global output at the expense of the US economy. Although the US is still the market driver, as is being demonstrated in the current credit crunch that began there, but the loss of US economy hegemony has cost the dollar its hegemony as well.
Developments in international currency markets affect the Israeli market, even as the strength of the Israeli economy supports a strong shekel. The main factors underpinning the strong shekel are the Israeli economy continuing 5% GDP growth a year, the maintaining of fiscal discipline, and high foreign currency balances, not to mention that the US sub-prime mortgage crisis is not affecting Israel.
The predominant impact of the weak dollar in Israel is the way it offsets domestic inflation, enabling the Bank of Israel to keep the interest rate at its present level. The last time that the shekel-dollar exchange rate was at NIS 4/$ in May, the Bank of Israel cut the interest rate even though inflation was within the target range and many exporters opposed the cut because it would hurt their competitiveness. The interest rate cut led to a jump in inflation and an interest rate hike to contain it.
It will now be interesting to see how the Bank of Israel will respond to the weak dollar in wake of the lesson of recent months. Exporters will undoubtedly also be heard again.
The main factor driving the dollar down is expectations that Federal Reserve Board Chairman Ben S. Bernanke will again cut the US interest rate in another month, which will further erode motivation to invest in the dollar. These expectations, combined with the breaching of longstanding technical barriers such as the NIS 4/$ exchange rate, are driving the strong shekel in the short term. In the medium term, a soft landing by the US economy and renewed growth resulting from an interest rate cut could help the dollar, but its seems likely that investors will need more time to decide which way the US economy is heading.
Published by Globes [online], Israel business news - www.globes.co.il - on October 1, 2007
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