The shekel has been strengthening today against the dollar and against the euro. In afternoon inter-bank trading, the shekel-dollar exchange rate is down 0.38% at 3.735/$ and the shekel-euro rate is down 1.06% at NIS 3.992/€.
On Friday, the Bank of Israel set the representative shekel-dollar rate up 0.241% at NIS 3.745/$, and the representative shekel-euro rate was set 0.948% higher at NIS 4.035/€.
With the exception of a few days in March 2020 at the start of the Covid pandemic, the shekel is at its weakest against the US dollar since December 2018. The shekel has depreciated by 6% against the dollar since the start of the year and by 12% over the past 12 months. In June 2022, the shekel-dollar exchange rate was just over NIS 3.30/$.
Last week Bank of Israel Governor Prof. Amir Yaron told the Eli Hurvitz Conference on Economics and Society, "The markets' reaction to the local events on the proposed changes to the judicial system," had caused an "excess devaluation that can be quantified at about 10%."
The shekel's weakness is one of the main factors today weighing on the cost of living and fueling inflation. BDO chief economist Chen Herzog said, "The weakening of the shekel reflects the markets' concerns about the alarming trend of rising prices, along with a slowdown in growth."
In order to halt the depreciation of the shekel, the Bank of Israel could sell some of the more than $200 billion in foreign currency reserves that it has accumulated in recent years when the shekel was strengthening. But there is a consensus among analysts that the Bank of Israel won't intervene at the moment.
Bank Hapoalim chief strategist financial markets Modi Shafrir said, "The Bank of Israel has clearly shown that it does not advocate intervention in the foreign exchange market, but repeatedly chooses interest rate hikes to moderate the depreciation of the shekel. The increase in inflation and interest rates erodes private consumption, but not just that. The devaluation of the shekel leads to an increase in interest rates leading to a reduction in the scale of investment in the economy."
Psagot chief strategist Ori Greenfeld believes that only if the shekel-dollar exchange rate reaches NIS 4/$ will the Bank of Israel intervene. "The Bank of Israel will probably choose to intervene in the foreign exchange market only if the depreciation makes it difficult for the economy's current operations. It is likely that this will not happen before the exchange rate crosses the NIS 4/$ threshold."
What is the Bank of Israel waiting for?
The Bank of Israel has good reasons to wait with any intervention on the foreign exchange market. Such an intervention could increase the negative sentiment of investors and actually exacerbate the sale of shekels. In addition, the Bank of Israel has a limited amount of foreign exchange reserves, which are kept as security for emergency situations.
So what could stop the depreciation? The analysts attribute this to a solution to the crisis surrounding the judicial overhaul. Shafrir says that "in light of the 'excess depreciation' resulting from the political unrest, it seems that only calm and healing of the rift in the nation will largely bring an end to the trend." In Greenfeld's estimation, "as long as there is no prospect of easing the political uncertainty, the volatility will continue. We can even expect the depreciation to continue in the event that the political crisis worsens."
Published by Globes, Israel business news - en.globes.co.il - on June 5, 2023.
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