The shekel is strengthening sharply against the US dollar today. In afternoon inter-bank trading the shekel is down 1.46% against the dollar at NIS 3.674/$ and is down 0.16% against the euro at NIS 3.849/€. Since the start of November the Israeli currency has been enjoying one of its best months in recent times.
Geopolitical optimism strengthening the shekel
The northern front has been heating up and in the past few days hundreds of rockets have been fired at northern Israel, the Sharon and Tel Aviv metropolitan regions but at the same time reports have been strengthening about a possible ceasefire in the coming days. Mizrahi Tefahot chief economist Ronen Menachem says, "Progress towards diplomatic arrangements on the northern front and the market's perception that the fighting in the north could be about to end brings optimism that strengthens the shekel."
In addition the past month has been positive for the shekel due to good economic data. The annual inflation forecast has moderated and the risk premium has fallen, while the most recent GDP data was more positive than expected.
Energy Finance CEO Yossi Frank adds,"What interests the market is the escalation with Iran and the fighting in the north. As soon as Iran lowered the flames, the shekel began to strengthen from the weekend and when rumors grew about a ceasefire with Lebanon, the shekel gains strengthened, and today we have already seen it move below NIS 3.70/$." Nevertheless, Frank says that the major testing point will be NIS 3.65/$ to which the shekel has not yet reached."
The dollar is weakening worldwide
While the shekel has appreciated against the dollar over the last month, the US currency itself has strengthened against a basket of major currencies. The DXY index, which measures the dollar's performance worldwide, reached 107 points during November (after starting at 104 points). But now the trend has changed and the dollar is weakening against the basket.
Menachem explains that there is now a correction for the period before and a little after the US elections: "Trump's victory in the elections led to positive sentiment in the markets, following expectations of Trump's business-friendly policies. Moreover, US monetary policy forecasts have slowed, and the heads of the Federal Reserve indicate that interest rates will not fall soon, which has strengthened the dollar."
Menachem stresses that the dollar's biggest gain has been against the euro. He explains, "The eurozone suffers from a series of problems. The escalation in the Ukraine war and the faltering economy in China, which is linked to economic activity in Europe, add to the currency's weak sentiment."
What will happen in the future?
The analysts believe that the shekel will move according to the geopolitical reality. An escalation in Israel will weaken the shekel to the higher rates of recent months while an agreement with Hezbollah, especially if will include a ceasefire or the return of the hostages, could lead to a further appreciation. In the long-term, the economic conditions in Israel, like the current account export surplus and the forecasted lower inflation, support a continuing strengthening of the shekel."
Published by Globes, Israel business news - en.globes.co.il - on November 25, 2024.
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