The shekel has been strengthening sharply today. In afternoon inter-bank trading, the shekel exchange rate is down 1.09% against the dollar at NIS 3.426/$ and down 1.18% against the euro at NIS 3.612/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.727% today from Monday, at NIS 3.463/$, and the representative shekel-euro rate was set 0.872% higher at NIS 3.656/€.
The shekel has recovered somewhat today but remains at its weakest levels for 20 months against the dollar, provoking concerns about imported inflation as global commodity prices rise. Inflation in Israel over the past 12 months has been 3.5%, far below the levels in Europe and the US. But in part this has been due to the strengthening of the shekel, which has moderated price increases of commodities like oil, which are quoted in dollars. The weakening of the shekel - it has been devalued 11% against the dollar this year - is now likely to have the opposite effect.
The main factor driving the volatility of the shekel in recent weeks has been the sharp falls on global stock exchanges. This has compelled Israeli institutional investors to hedge their overseas positions by buying foreign currency. The rise in the market yesterday has had the obverse effect, forcing the investors to sell foreign currency, thus strengthening the shekel. Clearly the future direction of the shekel in the coming weeks will be dictated by trends on Wall Street.
Another factor weakening the shekel is the widening interest rate gap between the US and Israel. The US Federal Reserve raised the rate by 0.5% last month and is expected to introduce two more 0.5% hikes over the next two months. The Bank of Israel, which raised the rate by 0.25% in April to 0.35%, is now expected to raise interest rates again at the next meeting of the Monetary Committee on May 23.
Published by Globes, Israel business news - en.globes.co.il - on May 11, 2022.
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