The shekel continues to depreciate sharply. In afternoon inter-bank trading, the shekel-dollar rate is 1.20% higher at NIS 3.762/$, and the shekel-euro rate is 1.32% higher at NIS 4.118/€.
It seems that the shekel's steep losses are due mainly to the security escalation in Israel with the dollar stable against other foreign currencies over the past few days.
Israel Discount Bank macroeconomic and markets analyst Einat Meir says, "At the start of the month, the weakening of the shekel was supported by negative sentiment in the stock markets abroad, and in particular, by sharp declines on Nasdaq. However, in recent days the shekel's depreciation has strengthened due to the worsening security situation in the north, a deterioration, which has also been reflected in the increase in Israel's CDS premium, despite the renewed gains on Nasdaq." "The growing fears of a real escalation on the northern front, in view of another assassination of a Hezbollah operative, is weighing on the shekel." Mizrahi Tefahot Bank chief economist Ronen Menachem tells "Globes." Menachem adds that as the retaliatory attacks continue, the scenario assuming that the fighting on this front will not develop into all-out war is increasingly undermined, with all its potential consequences.
Political developments also weigh on the shekel
The situation is also warming up on Israel's political front. Menachem cites remarks by senior army generals and government figures that the war will continue throughout 2024. Menachem adds, "Add to that there is the tension around the 2024 state budget, which should be discussed in the cabinet and the Knesset for approval by the end of the month. Reports in the media about disputes between senior Ministry of Finance officials obviously does not add to the health of the situation. Then there is the difficulty of financing the growing deficit within the current coalition limitations."
Meir recalls that the Bank of Israel did not sell any dollars at all in December and since the start of the war has sold only $8.5 billion out of its plan to sell up to $30 billion, which it announced after the outbreak of the war. She says, "The continued weakening of the shekel may lead the Bank of Israel to resume its foreign currency sales. In our estimation, the volatility in the foreign exchange market will continue due to the uncertainties arising from the consequences of the war."
Menachem adds, "There is a momentum that may constitute a correction to the sharp appreciation of NIS 0.45 since the depreciation that came at the beginning of the war."
Published by Globes, Israel business news - en.globes.co.il - on January 10, 2024.
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