The forex market has been stormy and the shekel has been sharply weakening since Tuesday. Even though the Tel Aviv Stock Exchange has been closed for the Passover holiday and local foreign exchange traders have been on vacation, the Israeli currency has been depreciating. In futures contracts the shekel-dollar exchange rate is up 1.24% at 3.669/$ and the shekel-euro rate is up 2.11% at NIS 4.032/€ - a level not seen since 2020. The shekel-sterling rate is 1.68% higher at NIS 4.57/£.
On Tuesday, the Bank of Israel set the shekel-dollar representative rate 1.684% higher at NIS 3.624/$, the shekel-euro rate was set 1.569% higher at 3.949/€, and the shekel-sterling rate was set 1.123% higher at NIS 4.503/£.
Even though the shekel is fast approaching NIS 3.70/$ for the first time since March 2020, in recent months the US dollar has significantly weakened against the world's major currencies. The dollar index is 10% below its peak last year, when the Federal Reserve was raising the interest rate sharply.
Even when Prime Minister Benjamin Netanyahu fired Minister of Defense Yoav Gallant and there were spontaneous mass protests against the government's judicial overhaul and the Histadrut called a general strike, the shekel did not weaken to these levels. Even the security escalation last week with rockets fired from Lebanon, Syria, and Gaza and deadly terrorist attacks in Israel did not see the shekel depreciate to its current extent.
On social media, the sharp depreciation of the shekel has been attributed to leaks that ratings agency Moody's is set to cut Israel's credit rating outlook tomorrow from positive to stable. However, there is no credible support for this rumor in the international financial media or reliable market sources. In addition, trading volumes have been low with most Israeli traders on vacation so that relatively small transactions can distort exchange rates. A clearer picture will be available later today when Israeli traders return to the forex arena.
Market sources believe that in normal circumstances the shekel-dollar exchange rate would be NIS 3.4/$. But these are exceptional times with the government's planned judicial overhaul weighing very heavily on the Israeli currency, even if the issue has been suspended until after the Knesset Passover recess, while compromise talks take place under the auspices of President Isaac Herzog. Nor has the security escalation helped the shekel but in the past terrorist incidents and even major operations against Gaza have barely dented the Israeli currency.
In contrast the government's efforts to reform Israel's judiciary have impacted the way the country is perceived abroad. Six weeks ago credit rating agency Moody's warned that the proposed changes could, "materially weaken the strength of the judiciary and as such be credit negative." However, since the judicial overhaul has been suspended, which suggests that Moody's will not downgrade Israel's credit rating. But it cannot entirely be ruled out that the outlook will be cut from positive to stable as a concrete warning after even Israel's senior officials at the Ministry of Finance and Bank of Israel have warned of the dire consequences for Israel's economy of promoting extreme and unilateral measures on the judicial system.
Published by Globes, Israel business news - en.globes.co.il - on April 13, 2023.
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