The shekel weakened at the opening of foreign exchange trading this morning. The shekel-dollar exchange rate is currently up 0.3% in comparison with Friday’s representative rate, at NIS 3.981/$. The shekel-euro rate is up 0.15%, at NIS 4.1931/€.
Update 13:15 After falling in early trading, the Tel Aviv Stock Exchange Tel Aviv 35 Index is up 1.46%.
Last week, the foreign exchange market was extremely active. The shekel-US dollar rate rose sharply at the beginning of the week, following the outbreak of war in the south of Israel, and the Bank of Israel intervened with an announcement that it would sell $30 billion of its foreign currency reserves, which served to stabilize the shekel somewhat and halt the rise in the shekel-dollar rate below NIS 4/$. In options trading yesterday, however, the rate reached NIS 3.99/$.
Chen Herzog, chief economist at BDO Consulting Israel, said, talking to "Globes", "The shekel-dollar rate is liable to cross the NIS 4/$ barrier this week, if the security threats worsen." He said that despite the unprecedented intervention by the Bank of Israel, the rate has climbed to just under that level.
Herzog points out that, because of the war, Israel faces a severe economic slowdown. "Although the depreciation against the dollar translates into higher prices for imported products, Israel is no longer in a situation of demand-driven inflation," he says. "The Bank of Israel will have to cut interest rates, while at the same time the government has to put together a broad plan for fiscal expansion and a change in national economic priorities."
By contrast, Bank Hapoalim chief economist Victor Bahar writes in his market survey: "Cutting interest rates and selling foreign currency are contradictory. If the interest rate is cut sharply, depreciation pressure on the shekel will grow." In his opinion the Bank of Israel will leave its interest rate unchanged for the time being.
"Selling foreign currency is not something that central banks are keen to do, because it can signal distress, and in certain cases can even achieve the opposite of the intended result," Bahar explains. "In Israel, the situation is different for two reasons: a) the foreign currency reserves are exceptionally high; b) Israel has a balance of payments surplus."
Bahar points out that the amount of $30 billion that the Bank of Israel specified is high, and should be enough to stabilize the exchange rate even if the war lasts for several months. "To put matters in proportion, since the beginning of the year, the financial institutions have been buying foreign currency, but not more than $10 billion in total."
Published by Globes, Israel business news - en.globes.co.il - on October 16, 2023.
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