The shekel strengthened against the US dollar at the opening of trading on the foreign exchange market by 0.46% in comparison with Friday’s representative rate, to NIS 3.6901/$. The shekel strengthened against the euro as well, by 0.55% to NIS 3.9993/€.
Last week, the shekel strengthened by 1.5% against the US dollar. The dollar was generally weak on world markets last week, but looking at the movement in the shekel since the beginning of the month, it’s hard to miss the volatility against foreign currencies, and last week’s appreciation could change in accordance with various factors.
Modi Shafrir, chief financial markets strategist at Bank Hapoalim, explains the shekel’s recent strength by the rise in share market indices in the US, leading to currency conversion by Israeli financial institutions. "The institutions’ exposure has reached a peak in recent months, and the rise in the share indices has led to purchases of shekels by them." Financial institutions have to buy shekels to avoid higher currency exposure when their dollar-denominated assets rise in value.
Meitav Dash chief economist Alex Zabezhinsky points out that the shekel has strengthened despite the rise in Israel’s risk premium on the credit default swap market in the past two weeks. "The strengthening of the shekel correlates with the rise in US stock markets, as it did until the end of 2022, before the disruption caused by the judicial overhaul," Zabezhinsky says.
The reason for the change, in Zabezhinsky’s view, is that "players in the local market want to raise their foreign currency exposure even further, unless circumstances change drastically for the worse." He adds that, according to the Bank of Israel’s data on foreign currency trading, activity by local investors has risen considerably, while the activity of foreign players has fallen sharply.
Along with the rises in world stock markets, local security developments continue to affect the foreign exchange market. Shafrir says that the rumors about a deal on the release of Israeli hostages and a ceasefire in the Gaza Strip, even a temporary one, support the strengthening of the local currency.
"Unless there is a significant deterioration in the security and political situation, the shekel can be expected to continue strengthening," Zabezhinsky says.
As mentioned, although the shekel strengthened last week, January has mainly been characterized by high volatility on the foreign exchange market. The shekel-dollar rate has ranged between NIS 3.6 and NIS 3.8. Among the factors behind the weakening of the shekel at the beginning of the month were military developments in the Gaza Strip and the fear of escalation in the north, together with statements by senior officials at central banks around the world concerning deferral of the expected interest rate cuts in Western countries.
Accordingly, any indication from US Federal Reserve chairperson Jerome Powell in his scheduled speech on Wednesday of interest rate cuts being brought forward or a higher pace of cuts could cause the US dollar to weaken on world markets, including in Israel. Conversely, continued caution on Powell’s part and more hawkish remarks such as we have heard from Federal Reserve officials could dampen expectations of interest rate cuts in the US and have an impact on the Israeli foreign exchange market.
Published by Globes, Israel business news - en.globes.co.il - on January 29, 2024.
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