After a relatively calm week on Israel's foreign exchange market, the shekel is again strengthening. In afternoon inter-bank trading, the shekel-dollar rate is 0.57% lower at NIS 3.707/$, and the shekel-euro rate is 0.90% lower at NIS 3.998/€. The euro is trading at its weakest against the shekel since August.
Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.539% from Monday, at NIS 3.728/$, and the representative shekel-euro rate was set 0.045% higher at NIS 4.035/€.
Why is the euro at its weakest for four months against the shekel?
The euro rate is not set directly against the shekel. The value of the euro against the shekel is calculated through the euro-dollar rate. So the strengthening of the shekel against the euro reflects two factors - the strengthening of the dollar against the euro, and then the strengthening of the shekel against the dollar.
Bank Leumi head of markets strategy Kobby Levi tells "Globes," that the reason for the strengthening of the euro against the dollar recently stems from changes in market expectations about the future trajectories of the US Federal Reserve and European Central Bank interest rates.
He says, "The dollar has been recovering slightly from its depreciation last month as a result of increased investor expectations that sharp interest rate cuts in the eurozone will occur soon." In Europe, following the recession, and weak macroeconomic data, growth forecasts for next year are zero. At the same time, the inflation rate in Europe has moderated sharply. Consequently, investors today believe that interest rates will fall during 2024 by1.5%, says Levi.
The balance between interest rate expectations in the US and the eurozone is contributing to the recovery of the dollar. Levi says, "The euro strengthened against the dollar when the markets assumed that the high interest rate in Europe would fall at a slower rate compared with the rate in the US. When last week, the expectations changed, and the gap in interest rate expectations between Europe and the US was reduced, we saw the dollar appreciating and gaining back what it had lost against the euro," Levi says.
The dollar is weakening against the shekel following due to local factors. Levi says that the strong Israeli economy, the positive trend in global stock markets, and foreign exchange sales carried out by the Bank of Israel support the shekel. He adds, "The Bank of Israel is still wary and sells dollars in moderation, when it deems it appropriate. In October it used $8.2 billion of the $30 billion it allocated for supporting the Israeli currency in the market." Tomorrow (Thursday) the foreign currency exchange reserves held by the Bank of Israel at the end of November will be published, and we will learn how much in foreign currency the Bank of Israel sold in October.
Levi also stresses that the shekel has been one of the weakest currencies this year, due to the political uncertainty in Israel. "Therefore a slight change in the negative sentiment in the market as well as the low liquidity environment typical of the end of the year is enough to support the strengthening of the shekel."
Published by Globes, Israel business news - en.globes.co.il - on December 6, 2023.
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