Israel’s foreign exchange reserves at the end of October 2023 stood at $191.235 billion, down $7.318 billion from their level at the end of September, the Bank of Israel reports.
The decline was due to foreign exchange sales by the Bank of Israel totaling $8.209 billion and a revaluation that decreased the reserves by $1.507 billion. The foreign exchange sales were out of the $30 billion allocated by the Bank of Israel to moderate the shekel depreciation because of the war.
Towards the end of October the shekel-dollar exchange rate had depreciated to NIS 4.08/$ but over the past week the Israeli currency has strengthened significantly. Yesterday alone the Bank of Israel set the rate down 2.783% from Friday, at NIS 3.877/$, and in afternoon inter-bank trading today it is down a further 0.54% at NIS 3.856/$.
The Bank of Israel's aim in selling the foreign currency was not to cause an appreciation in the shekel, but only to prevent a sharp devaluation and instability in the market. Sources familiar with the foreign exchange market told Globes that the sale of foreign currency at the beginning of the war was mainly conducted by foreign traders, so the stabilization of the exchange rate could indicate that the flight from the local market is balancing out as the war in the south proceeds relatively smoothly.
What is expected next?
It seems that there are several factors now adding to the strengthening of the shekel. First, the expectation in the market is that the war will not escalate beyond the current campaign. The assessment is that the main fighting will take place in Gaza and will not spill over to other arenas. Beyond that, the current forecast predicts that the war will be concentrated in the current quarter and will end by the start of 2024.
In addition, the stock markets in the US have strengthened recently with handsome increases in the various indices. This is in contrast to the previous months when there were mainly declines on Wall Street. The sharp increases have led institutional investors to adjust their exposure to foreign exchange and buy more shekels. These institutional investors had already increased their exposure to foreign exchange since the start of 2023 due to the political crisis in Israel, so any further increase in this exposure would not necessarily be to their liking, so any increase in the global markets leads to a strengthening of the shekel.
So far the Bank of Israel has not intervened drastically on the foreign exchange market, and it seems that as long as the war does not escalate, there is no reason for an increase in the level of risk in Israel. If an escalation in the fighting occurs, the exchange rate would be affected by this. On the other hand, the dollar has recently been weak in the world against foreign currencies, which could lead to further strengthening of the shekel due to external factors.
Published by Globes, Israel business news - en.globes.co.il - on November 7, 2023.
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