Once it became clear yesterday that Donald Trump had won the US presidential election, the US dollar began strengthening on the foreign exchange market, always the quickest of the financial markets to react. The DXY index, which measures the strength of the US dollar, rose 1.5% with strong gains against all the world's major currencies, and only a small amount of the ground has been lost today.
But the shekel has bucked that trend, strengthening by 0.24% against the dollar to 3.739/$ as well as by 1.866% against the euro to NIS 4.008/€. The shekel continued to appreciate against the dollar toay with the Bank of Israel setting the representative rate down 0.348% at NIS 3.726/$, although giving up a small amount of the strong gains against the euro - the shekel was up 0.15% at NIS 4.014/€.
Why has the election of Trump strengthened the US currency and how come the Israeli currency has bucked the trend and strengthened even more than the dollar, especially after Prime Minister Benjamin Netanyahu ousted Defense Minister Yoav Gallant. The first time Netanyahu fired Gallant in March 2023, the shekel weakened sharply in the wake of the public protests.
Mizrahi Tefahot Bank chief economist Ronen Menachem explains, "By and large, I think that the main and important thing in terms of the dollar, within the context of Trump's victory, is the fact that he and the Republican Party have a more deficit fiscal policy than the Democrats. Because to begin with, the US enters Trump's second term with a very high debt-GDP ratio (120% +), when for comparison the accepted level for a developed country over time is 60% of GDP. Combined with the high interest rate on the dollar, this is a recipe for an increase in the debt burden on the US economy and households there."
Menachem adds, "The more Trump's policy will be more deficit and if fiscal reduction measures are not taken, which will offset some of the expenses that his administration is planning, this means that there will be inflationary pressures. Trump's policy also includes the imposition of tariffs on the import of raw materials and capital assets from abroad (such as imports from China), and this also supports inflationary pressure. In a difficult situation, it will be hard for Federal Reserve chair Jerome Powell to continue cutting rates. This can moderate the path of cutting the interest rate on the dollar."
The war will impact more than the US elections
As for Israel, Menachem says, "By and large, what will determine the shekel-dollar rate is the local story which depends on developments in the war. If there is a diplomatic settlement in the north, through pressure from Trump who said in his victory speech that he does not start wars but ends them, and added to that there will be calm with Iran, it can strengthen the shekel. A situation of imminent political settlement in Israel can eventually lead to a strengthening of the shekel against the dollar, even if the dollar strengthens in the world." On the other hand, in a situation where the war and the uncertainty will continue, then the shekel may tread water.
Menachem adds that the relationship between the White House and the Fed is also a factor to consider. "Trump's first term was not the smoothest with Governor Powell. And yet, in the end, Powell's term was extended. The question is whether the full independence of the Fed will be preserved, and no pressure will be placed on it if it decides to moderate rate cuts as a function of fiscal expansion that Trump may introduce."
Finally, Menachem concludes that there is another aspect that may strengthen the dollar in the future, "It should be mentioned that the US does not act alone in the world. We have our arena in the Middle East, and relations between Taiwan and China and other regions. If we see intensifying geopolitical conflicts, the dollar may strengthen due to it being a safe haven currency in such times."
Published by Globes, Israel business news - en.globes.co.il - on November 7, 2024.
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