Shekel losses mount as market fears constitutional crisis

Shekels credit: Shutterstock Vladerina32
Shekels credit: Shutterstock Vladerina32

The shekel is trading against the US dollar at levels not seen since 2017, as hopes of a political compromise recede and oil prices soar.

The Israeli currency is again weakening today. In morning inter-bank trading, the shekel-dollar rate is 1.11% higher at NIS 3.850/$, and the shekel-euro rate is 0.85% higher at NIS 4.125/€.

Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.422% from Tuesday, at NIS 3.808/$, and the representative shekel-euro rate was set 0.481% higher at NIS 4.091/€.

The shekel is trading against the US dollar at levels not seen since January 2017, except for one day in March 2020 at the start of the Covid pandemic. The Israeli currency's continued depreciation is due to both domestic and international factors.

The domestic crisis in Israel is again weakening the shekel, after possible compromise on the judicial overhaul is fading ahead of next week's High Court hearing on petitions to cancel of the law on the reasonableness standard. The market fears a constitutional crisis and this is stoking the ongoing depreciation of the Israeli currency.

At the same time, the dollar is strengthening worldwide, as oil prices surge and fuel concerns that interest rates will remain high for longer than expected. The US dollar DXY index has risen to a six-month high of 104 points.

Mizrahi Tefahot chief markets economist Ronen Menachem told "Globes," that all these reasons create an economic environment that does not support the shekel, "Beyond the political crisis, the declines on Wall Street, together with the growing deficit that the Ministry of Finance recently reported, the data on the sharp declines in high-tech investments published yesterday, and the presence of the Moody's delegation in Israel and the fear of a difficult report for sure do not contribute to positive sentiment around the shekel."

He stresses, "The market knows that the Bank of Israel can raise interest rates due to the weakening of the shekel, after the Bank of Israel has identified the depreciation of the currency as the main factor fueling inflation, which adds to the concern in the markets." At the moment, Menachem emphasizes, there are no factors indicating any slowdown in the shekel's depreciation.

Further proof of the dire situation of the shekel can be seen from a recent report published by Citi Bank in which the bank profited from its short position on the shekel against the dollar and euro.

Citi explained that the growth forecast in Israel looks weaker in the long term due to the delicate political situation, which also leads to less dollar investments and increases demand for the US currency. Citi added, "The forecast for the near future is that we will see a higher foreign exchange rate."

Are we seeing the shekel-dollar exchange rate reaching a new high?

Menachem explains that the market is extremely volatile and can move in any direction by more than 1%, "This is the new normal market". Taking today's situation into account, Menachem sees a possibility that the exchange rate could also reach NIS 3.9/$. "This is absolutely possible, what's more the momentum is negative at the moment." Menachem concludes that the market is approaching a level where the Bank of Israel will take action, but it is not at all certain when we will get there.

Published by Globes, Israel business news - - on September 7, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Shekels credit: Shutterstock Vladerina32
Shekels credit: Shutterstock Vladerina32
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