The shekel is continuing to strengthen against the US dollar, after the Israeli currency depreciated sharply in the first half of the year, due to falling stock markets overseas and the economic uncertainty which pushed investors towards the safe haven dollar. The shekel's rebound comes in the wake of Wall Street's recovery, further fueled over the past 24 hours by the lower than expected US inflation data.
The shekel has again been strengthening today against the dollar and against the euro. In afternoon inter-bank trading, the shekel exchange rate is down 1.52% against the dollar at NIS 3.241/$ and is down 0.40% against the euro at NIS 3.351/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate down 0.240% from Friday, at NIS 3.327/$, and the representative shekel-euro rate was set down 0.578% at NIS 3.369/€.
The shekel is trading at levels against the dollar not seen since April. The shekel strengthens when Wall Street rises because the exposure of Israel institutional investors on the local market to foreign currency rises in technical terms. As their exposure is already at record levels, the institutions sell dollars and buy shekels when the market is rising to reduce their exposure and comply with their exposure policies. In the first five months of the year when the markets were falling these institutions purchased over $10 billion, after selling $24 billion in 2021 as the markets surged.
The US inflation figures are another trigger effecting the exchange rate, or to be more precise the real interest rates in the US and Israel. The real interest rate is the nominal interest rate after deducting inflationary expectations. When the real interest rate gap between the US and Israel narrows, the shekel strengthens.
The data published yesterday in the US showed lower than expected inflation. This injected optimism into the markets and the expectation that US Federal Reserve interest rate hikes designed to restrain inflation will now be more moderate. In theory the higher the US interest rate, the bigger the attraction for investors to convert shekels to dollars and enjoy higher returns. But with US inflationary expectations falling, this momentum is reversed.
The strengthening and weakening of the shekel also significantly influences inflation in Israel. In 2021, the appreciation of the shekel moderated price rises of imported goods like oil, while in the first half of 2022, the depreciation of the shekel contributed to inflation. The strengthening of the shekel since the start of July is now likely to moderate inflation.
Published by Globes, Israel business news - en.globes.co.il - on August 11 2022.
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