After reaching its weakest level in more than a decade, the shekel began to strengthen again against the US dollar this week. The shekel-dollar exchange rate fell below NIS 4/$, with the shekel appreciating by almost 3%. Today’s representative rate was set at NIS 3.962/$. The change in trend offset about half of the shekel’s loss of value in relation to the dollar since the outbreak of war. Why is the shekel strengthening, and will the trend continue?
The change in direction on the foreign exchange market has come despite the fact that the war, which was the main reason for the depreciation of the shekel in the past few weeks, looks as though it is far from being over, and the IDF’s ground operations are being expanded. Mizrahi Tefahot Bank chief markets economist Ronen Menachem told "Globes": "The market hopes that the ground operations stage will actually shorten the war and its effects, whether through a decisive victory, or through international pressure for a ceasefire, with President Biden in fact calling for a ‘pause’ today."
Besides that, since the start of the fighting, the Bank of Israel has signaled that its focus is on the foreign exchange market and on stabilizing the shekel. It announced a program of sales of foreign currency (how much it has actually sold we will find out next week with the publication of the foreign currency reserves figures), and Governor of the Bank of Israel Amir Yaron described the depreciation of the shekel as "the greatest inflationary risk." That was one of the main reasons, perhaps the most important of them, that the Bank of Israel left its interest rate unchanged in its last decision. "It is certainly possible that the Bank of Israel is reinforcing the trend of appreciation of the shekel by selling dollars."
External factors are also affecting shekel exchange rates. Meitav chief economist Alex Zabezhinsky explains that yesterday’s decision by the US Federal Reserve to leave its interest rate unchanged led to a weakening of the dollar on world markets. In addition, he says, "The rises on US stock markets recently could certainly contribute to appreciation of the shekel." He explains that Israeli financial institutions may have responded to rises on Wall Street by selling dollars, with the aim of moderating the increased currency exposure arising from their holdings of US-traded securities.
"In the past year, the correlation between rises in US stocks and appreciation of the shekel against the dollar diminished, and Israeli financial institutions raised their currency exposure considerably, because of growing political and economic uncertainty in Israel. They entered the war with increased exposure, which they will probably try to reduce the more that Wall Street strengthens."
Menachem estimates that although the connection between Wall Street and the shekel may have weakened because of the uncertainty of the past year, it has not completely disappeared. "We have seen three successive days of rises in the US, and that has a degree of positive impact on the shekel," he says.
Will the shekel continue to strengthen?
Can the positive trend be expected to continue? Ronen Menachem be lives that it can. "I see the shekel continuing to appreciate… the local stock market also appears more hopeful, with rises in the past four days."
Zabezhinsky sees continuation of the trend of an appreciating shekel as dependent on, among other things, the desire of local financial institutions to reduce their currency exposure. "I assume that they won’t want to increase their currency exposure beyond what they have done so far, and so any strengthening of the US markets will probably lead to a strengthening of the shekel."
Published by Globes, Israel business news - en.globes.co.il - on November 2, 2023.
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