Even though rating agency Fitch has kept Israel's credit rating and outlook unchanged, the shekel is depreciating against the dollar and is at its weakest since December 2018. This in part reflects the world forex markets in which the US dollar is strengthening.
The Bank of Israel set the representative shekel-dollar rate up 0.027% from Friday, at NIS 3.724/$, and the representative shekel-euro rate was set 0.406% lower at NIS 4.077/€. In late afternoon inter-bank trading after the rate was set, the shekel-dollar rate was 0.73% higher at NIS 3.755/$, and the shekel-euro rate was 0.1% higher at NIS 4.081/€.
The factors weakening the shekel are both domestic and global. Mizrahi Tefahot Bank chief economist Ronen Menachem said, "After we have seen for a long time a moderation in the rate of inflation, the increase in the Us producers index creates a feeling that the fight is not over yet, and that the Fed will not rush to declare victory in the fight against inflation."
Another external factor is the falls in the Nasdaq index, which "Cause institutional bodies to increase their exposure to foreign exchange in order to balance their investment portfolio. These declines cause the shekel to weaken even more."
But not only overseas factors are contributing to the weakening of the shekel. The situation in Israel has not recently been encouraging for the foreign exchange market, and it seems that local sentiment is a cause for concern for this market.
IBI Investment House senior economist Ragi Gozlan said, "The depreciation of the shekel in recent days is a combination of several factors, as the dollar has strengthened globally, but the domestic factor is more dominant," Gozlan points out that despite the strengthening of the dollar in the world, the shekel is also weakening compared to other currencies: "The shekel is depreciating not only against the dollar but against the entire basket, significantly compared to leading currencies in the world."
The current situation of the shekel is not encouraging, Gozlan adds. "As the shekel stabilizes at current levels and above, the effect of the exchange rate on inflation, which has been relatively moderate until now, is expected to increase." This is because the renewal of import inventory is done at higher exchange rate levels, explains Gozlan.
"As time passes and the exchange rate is based on rates of NIS 3.7/$ and above, and NIS 4/€ and above against the euro, the renewal of import stocks will be done at these levels, compared with inventory that was imported half a year ago at lower exchange rates." Due to this, it is reasonable to expect in the next quarter or two a higher contribution to inflation as a result of the weakening of the shekel, according to Gozlan.
Gozlan concludes that the internal concern "Undoubtedly comes from the judiciary." This is due to the expected decision of the Supreme Court on the reasonableness standard and concerns about a constitutional crisis. Menachem agrees that the sentiment surrounding the Israeli economy as a whole is not particularly positive: "Everything is working towards the weakening of the shekel. We see the market correcting the strengthening of the shekel after rumors about the normalization agreement with Saudi Arabia."
Published by Globes, Israel business news - en.globes.co.il - on August 14, 2023.
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