The shekel depreciated sharply today against the basket of currencies in the wake of the steep falls in the financial markets, following the US Federal Reserve Board's dramatic lowering of its interest rate to zero. The Fed's measure was aimed at boosting liquidity in the markets and signaling that it was taking part in the effort to reduce the coronavirus's effect on the economy.
Unfortunately, the move had the effect of causing panic, and the falls on global markets are exacerbating the upheaval in the foreign currency market. the representative shekel-dollar rate was set 2.08% higher today, at NIS 3.7280/$, and the representative shekel-euro rate was set 2.11% higher, at NIS 4.1639/€.
It appears that the depreciation of the shekel against the dollar and the euro is not a result of a worsening of the economic trends in Israel in comparison with overseas; the causes are mainly "technical" and short-term, and they have created surplus demand for foreign currency, mainly among investment institutions. Mizrahi Tefahot Bank chief economist Ronen Menachem says, "The upheaval in the markets initially did not affect the shekel, among other reasons because of the addition of Israeli government bonds to the international indices this year. Now, however, due to the falls overseas, investment institutions exposed to investments on overseas stock markets are having to meet margin calls, and their demand for dollars has therefore risen substantially.
"Furthermore," Menachem adds, "bear in mind that the shekel has been the world's strongest currency for a long time, despite Israel's country and political risk. It could be that the first days of the depreciation became a trigger for yet stronger movement, and at the moment it is speeding up because of mounting risk aversion."
It should be remembered that the Bank of Israel has an enormous quantity of dollars. "If the Bank of Israel thinks that a rapid devaluation will set off inflationary pressure and make it difficult to lower the interest rate or inject liquidity, it can sell some of its foreign currency balances," Menachem observes.
Published by Globes, Israel business news - en.globes.co.il - on March 16, 2020
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