At the opening of this week’s trading on the foreign exchange market, the shekel has weakened sharply against the US dollar. The shekel-dollar exchange rate is currently 1.41% higher in comparison with Friday’s representative rate, at $3.7074. Against the euro, the shekel has weakened even more this morning, by 1.58%, to NIS 4.0541/€.
Last week, the shekel depreciated by about 2% against the US dollar, and by about 1.25% against the euro.
Mizrahi Tefahot Bank chief economist Ronen Menachem points to a number of local factors tending to weaken the shekel. "The escalation in the north and in Judea and Samaria, Israel being brought before the International Court of Justice, and the interest rate cut by the Bank of Israel at the beginning of the month, have led to the shekel depreciating against the US dollar, after a prolonged period in which it strengthened.
"Today’s sharp depreciation comes after the Bank of Israel released foreign exchange reserves figures yesterday showing that it had not sold dollars at all to balance the foreign exchange market, a possibility that the central bank continues to keep on the table despite the strengthening of the currency and the sharp appreciation since the end of October."
Menachem says that although the Bank of Israel did not intervene at all in December and made only small sales in November, "if the current depreciation of the shekel continues, it may renew sales of dollars."
The recent depreciation of the shekel will first and foremost affect inflation, as a weaker shekel could mean rises in prices for imported products. If that happens, it will become harder for the Bank of Israel to make further interest rate cuts. There is also the question of the 2024 state budget, which is causing considerable impatience among senior Bank of Israel officials, who are calling for changes in the budget and the exercise of judgment in the way money is allocated and spent, in the light of the cost of the war. "The bank hopes that the adjusted budget will include an intention of reducing the ratios of government debt and the fiscal deficit to GDP once the war is over," Menachem says.
Continued volatility
The war in the Gaza Strip continues to be a risk factor for Israel on the markets. Escalation in the north or in hostilities with the Houthis in Yemen will change the picture as far as the war is concerned and create even greater uncertainty concerning Israel. In addition, the interest rate gaps between Israel and other countries are now seen continuing for some time, as expectations of interest rate cuts by the US Federal reserve and the European Central Bank recede.
"Given the long list of factors that will challenge the shekel at home and abroad in the coming period," Menachem says, "it will probably continue to be fairly volatile, and the current trend of depreciation may continue for a while."
Published by Globes, Israel business news - en.globes.co.il - on January 8, 2024.
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