Shekel strength confounds chief economist

Shekel credit: Shutterstock Vladirina 32
Shekel credit: Shutterstock Vladirina 32

In an analysis of the Israeli currency's performance since October 7, the Ministry of Finance chief economist concluded that traditional factors could not explain the appreciation.

Since the start of the war the shekel has gained 5.5% against the US dollar. The Ministry of Finance chief economist today published an analysis presenting the factors that might have supported this trend but as the title hints "The unexplained appreciation of the shekel during the Swords of Iron War," the Ministry of Finance has not successfully found the main reason.

At the start of the war, the shekel weakened by 5% against the US dollar but then at the beginning of November there was a turning point with the shekel strengthening beyond its exchange rate on October 7, even though Israel's risk premium remained high.

The analysis presents factors that traditionally influence the exchange rate, such as an excess deficit, inflation gaps between the local economy and trading partner countries, and of course Israel's risk premium. The level of development of the economy and the local demand for investments also affected the movement of the exchange rate, according to the report, but their effect is slower and extends over a long term.

In addition, the analysis indicates that until the year 2023, global factors directly affected the exchange rate in Israel, but last year until the outbreak of the war, this relationship loosened and at the beginning of the fighting, the increase in the risk premium in Israel was found to be the main factor in the depreciation of the shekel.

Nevertheless, the chief economist found that these traditional factors did not explain the strengthening of the shekel - neither the rise in the risk premium, which soared from 60 points to 140 points before falling back to 127, nor global factors, which only had a partial impact.

In addition, the analysis found that the Bank of Israel plan to sell foreign currency worth $30 billion was not the reason for the appreciation. This is because the Bank of Israel did not sell a significant amount in November and in December did not sell any foreign currency at all. The chief economist ruled out the possibility that the mere announcement of the plan was a factor that influenced the appreciation of the shekel and said, "It is difficult to suppose that the announcement would have had such a lasting and powerful effect on the exchange rate." Thus, the chief economist concludes, "It seems that in the last two months the shekel's appreciation has gone beyond the fundamental factors known to explain exchange rate developments over the short term."

Published by Globes, Israel business news - en.globes.co.il - on January 30, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Shekel credit: Shutterstock Vladirina 32
Shekel credit: Shutterstock Vladirina 32
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018