The decision by the US Federal Reserve yesterday to keep the interest rate unchanged and to indicate that it will begin cutting the rate in 2024 has seen the US currency fall against most the world's major currencies and it is depreciating today especially sharply against the shekel.
In morning inter-bank trading, the shekel-dollar rate is 1.01% lower at NIS 3.673/$, and the shekel-euro rate is 0.12% higher at NIS 4.005/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.054% from Tuesday, at NIS 3.71/$, and the representative shekel-euro rate was set 0.102% lower at NIS 4.00/€.
The shekel is at its strongest against the US dollar since the beginning of August after the US Federal Reserve indicated it expects to make three rate cuts in 2024 rather than the previously forecast two. Thus the Us interest rate is likely to fall next year from its current 5.25%-5.5% level to about 4.6% at the end of 2024.
Mizrahi Tefahot Bank chief economist Ronen Menachem explains, "The transition to less hawkish language by the US Federal Reserve has resulted in the depreciation of the dollar against the euro and against the shekel. I estimate that the depreciation of the dollar is also related to political issues like the impeachment proceeding that the Republicans have begun in Congress against President Biden. Although these proceedings are expected to be blocked by the Senate the very involvement in the matter and the difficulties in decision making in a split Congress do not add anything healthy to matters.
"This development is important for two reasons. Firstly it shows that the 'rules of the game' are still operating and the shekel is responding economically to the depreciation of the dollar in the world and the rise in the US stock market. The link between the two may be weak this year, a point that the Bank of Israel tends to stress, but it has not disappeared and as economic variables return to the front of the stage, I believe that it will again strengthen.
"Secondly, in view of the war and the question marks regarding its development and the issue of the budget, this factor offsets things, and cuts the potential depreciation that the shekel could register, if the 'local story' was the only factor. In the same way, price pressures from a sharper potential depreciation of the shekel are relieved and the Bank of Israel will be able, as much as that it deems appropriate, to adopt a less restrictive monetary policy.
"It does not seem that this will affect the level of the interest rate already in the upcoming decision, at the beginning of January, but the Bank of Israel will be able to follow the Fed and give stronger signals about moving to a more lenient policy, during the first half of the year."
Bank Leumi head of markets strategy Kobby Levi agrees with Menachem. He says, "The dollar is weakening worldwide and to about NIS 3.66/$ against the shekel. Its value has also fallen about 1% against the euro, Japanese yen and other currencies.
The depreciation began after the Fed's interest rate decision last night, which somewhat surprised investors. The Fed did, as expected, leave the interest rate unchanged. But the Fed members' expectations report states that three interest rate cuts are expected next year, more than they expected the last time the report was published in September, when they expected about the rate to fall to about 5.1%.
"Despite the drop in the exchange rate against the dollar, the shekel maintains its value relative to the euro, around a rate of NIS 4/€. The low liquidity environment that has characterized the last few weeks continues, and the drop in the exchange rate of the shekel against the dollar is mainly due to the change in the value of the dollar in the world."
Published by Globes, Israel business news - en.globes.co.il - on December 14, 2023.
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