The shekel strengthened against the major currencies on Friday, continuing the recent trend. The representative shekel-dollar rate was set 0.86% lower, at NIS 3.6830/$, and the representative euro rate was set 1.07% lower at NIS 4.0475€.
IBI Investment House chief economist Rafi Gozlan believes that there is one main factor and one secondary factor behind the strengthening of the shekel. "First of all," he says, "there is optimism on the foreign exchange market about the negotiations in Qatar on a ceasefire agreement (in the Gaza Strip) and the release of hostages." Gozlan reminds us that only a week ago the picture was very different, and the markets feared escalation in the region in the event of an attack by Iran. "The sharp switch and the change to expectations of a breakthrough in the negotiations led to optimism and calmed the markets down."
Israel’s perceived risk premium fell, and that found expression on the foreign exchange market, he explains. Even so, the market remains highly volatile, as the shekel weakens one week and strengthens the next. Should the negotiations in Doha fail, Gozlan says, we will see the shekel weaken again.
The other factor, according to Gozlan, is the strengthening of New York stock markets. "We know that Israeli financial institutions are highly exposed to foreign currency, and so when the markets in the US rose again, they had to sell dollars in large quantities in order to balance their portfolios," he says. The S&P 500 Index rose by more than 4% last week, the Nasdaq index rose by more than 5%, and the Dow Jones Industrial Average rose by about 3%.
The rises on Wall Street came on top of a weakening of the US dollar on world markets. The US dollar index (DXY) has fallen by 1.91% in the past month.
Interest rate gap
Mizrahi Tefahot Bank chief markets economist Ronen Menachem adds to that the inflation figures released in Israel last Thursday. "The Consumer Price Index reading was at the upper end of market estimates, and joins other metrics, such as the high fiscal deficit and the risk premium, that indicate that an interest rate cut should not expected in Israel any time soon," he says, adding that, meanwhile, an interest rate cut by the US Federal Reserve is expected as soon as September. "The growing interest rate gap between Israel and the rest of the world thus strengthens the shekel," Menachem says.
Published by Globes, Israel business news - en.globes.co.il - on August 18, 2024.
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