The shekel has weakened in the first week of 2024. In afternoon inter-bank trading, the shekel-dollar rate is 0.09% higher at NIS 3.649/$, and the shekel-euro rate is 0.32% higher at NIS 3.996/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.802% from Tuesday, at NIS 3.647/$, and the representative shekel-euro rate was set 0.151% higher at NIS 3.983/€. But the shekel began the year at NIS 3.60/$, so what has happened to cause the Israeli currency to lose ground?
IBI chief economist Rafi Gozlan tells "Globes" that the events influencing the foreign exchange market this week stemmed mainly from domestic matters. Firstly there was the interest rate cut by the Bank of Israel. Gozlan says, "The market expected the interest rate to be cut by the bank, and was not surprised by the actual cut, but the market had not fully priced it in, so we saw the shekel weaken against the dollar following the decision." Interest rate differences affect the attractiveness of the market, and a falling interest rate makes a country less profitable for investment compared with other countries.
Beyond that, the northern border became very tense this week. Gozlan points out that the assassination of Hamas deputy leader Saleh al-Arouri in Beirut affected the market: "The escalation on the northern front led to a reaction on all markets, the shekel weakened, the stock market (TASE) plunged and Israel's risk premium in the world rose."
The threats to Israel are not only relevant to the northern sector. Mizrahi Tefahot Bank chief economist Ronen Menachem, chief economist told "Globes," He says, "The Houthis continue to cast a shadow on global foreign trade and this is especially true from the Israeli point of view."
Apart from these events, Gozlan points out that 2023 ended with the dollar weak worldwide. He says, "The end of the year sees sparse trading on the markets following the holidays. Trading of the dollar weakened globally and also led to the strengthening of the shekel at the end of the year. Now we see the dollar returning to its original level." This explains part of the strengthening of the US currency regardless of what is happening in Israel.
What will now happen?
Security matters will continue to be a source of concern for the markets. Gozlan stresses, "The defense sector is one of the main elements that influences the Israeli market. The 'day after the war' discussion, which relates not only to the geopolitical environment but also to the political aspect and whether Israel will go to the elections at the end the war add a layer of uncertainty that will affect the markets and the shekel in the future."
Menachem points out this week's High Court of Justice decisions quashing the government's judicial reform law on reasonableness and postponing application of the recusal law to the next Knesset could lead to future tensions: "A significant part of the strengthening of the shekel since the outbreak of the war is related to the assumption that the issue would drop from the agenda and not return to its former intensity. Although during the fighting the issue has indeed received a low resonance, it may again challenge the markets, and the shekel within it, in the future."
Published by Globes, Israel business news - en.globes.co.il - on January 4, 2024.
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