The shekel has ended July at its strongest against the dollar in over six months. The Bank of Israel set the representative shekel-dollar rate today down 0.339% at NIS 3.233/$, the strongest since January 19, several days after the central bank announced that it would buy $30 billion in foreign currency in 2021.
The shekel is also trading at six month strongest levels against the euro and other major currencies. The Bank of Israel set the shekel-euro rate down 0.065% today at NIS 3.849/€.
In futures trading this afternoon, the shekel strengthened by a further 0.09% against the dollar to NIS 3.230/$ and by 0.25% against the euro to NIS 3.839/€.
The strengthening of the shekel against most of the world's major currencies has again fueled concerns about Israeli exports, especially as the Bank of Israel may not continue buying large amounts of foreign currency. The Bank of Israel bought $25 billion in foreign currency in the first half of 2021. While it has acknowledged that it will likely exceed the planned $30 billion for all of 2021, foreign currency purchases in the second half of the year are expected to be significantly reduced.
The shekel has been gaining as the flow of foreign currency into the Israel economy from abroad has strengthened, causing a sharp appreciation of the Israeli currency. Israel's current account surplus has grown, direct investments in Israel have risen, Israeli investment institutions have been selling big amounts of foreign currency due to the profitability of their investments in overseas capital markets, and foreign investors have been buying Israeli government bonds.
Although Israel's exports have grown despite the appreciation of the shekel, since the beginning of January, during the third lockdown, the Bank of Israel Monetary Committee has expressed worries that exports would be hit at a certain stage. Members of the Monetary Committee feel that export companies will be forced to close, including small companies.
Nevertheless, Mizrahi-Tefahot Bank chief strategist Modi Shafrir said, "The Bank of Israel has to moderate its purchases because on the other side of the coin there are those harmed by the Bank of Israel's decision to halt the appreciation of the shekel in 2021. If the shekel was for example NIS 3.15/$ - as it would have been if there had not been massive intervention over the past year - then there would have been less pressures on prices in terms of imports or overseas shipping prices, which have jumped. The Bank of Israel launched the program in order to assist exporters but it appears that the circumstances in the economy have since changed."
He added, "The Bank of Israel hinted last week that the foreign currency purchasing program will end and it will operate from time to time in the foreign currency market. The Bank of Israel's program was a special program for a special situation. The purchasing program stopped the appreciation in 2021. Since the situation has improved, it looks like the Bank of Israel will end its program at the end of 2021, and next year will purchase foreign currency according to the situation in the economy, as happened previously. The Bank of Israel will buy foreign currency in 2022 but the purchases will moderate because the situation won't justify it."
Shafrir explained, "What led to the renewed strengthening of the shekel was the rises on stock markets worldwide, which led to most of the sales of foreign currency by institutional investors, together with the basic forces that supported a strong shekel like a substantial current account surplus and the sharp rose in the scale of foreign investments in Israel. A strong shekel is good for consumers in Israel because it cuts the cost of living and moderates the price of goods and shipping. The importers absorb some of the price rises while on the other hand high-tech exporters have no need to worry, and low-tech exports (which are harmed by the strong shekel) have also risen lately."
Published by Globes, Israel business news - en.globes.co.il - on July 30, 2021
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