Shekel weakens sharply

Shekel Photo: Shutterstock Vladirina 32
Shekel Photo: Shutterstock Vladirina 32

The expectation of an interest rate hike in the US this week and falling US stock markets are pushing the shekel-dollar rate higher.

The dollar-shekel exchange rate has risen to a level not seen since November 2020, in anticipation of the interest rate announcement by the US Federal Open Market Committee on Wednesday this week (21:00 Israel time), and against a background of falling stock markets. The US dollar is strengthening on world foreign exchange markets, because of the inflation rate in the US, which is seen likely to bring in train aggressive interest rate hikes, and the uncertainty created by the war in Ukraine, which is expected to stoke inflation worldwide.

The expectation of a 0.5% interest rate hike in the US, in the light of the Federal Reserve's determination to tighten monetary policy, is leading to a weakening of the shekel against the dollar, because of the interest rate gap that will open up between the two currencies, an effect welcomed by the Bank of Israel.

An interest rate gap in favor of the dollar helps in curbing the appreciating trend in the shekel, which has been halted since the beginning of this year, after the Israeli currency appreciated rapidly last year, despite the Bank of Israel's attempts to rein it back through foreign currency purchases amounting to $35 billion.

The tightening of monetary policy by the Federal Reserve has led to falls on equity markets, in the expectation that the cost of money will rise rapidly. The falls in equities since the beginning of the year, and especially in April, have led to a weakening of the shekel, as a result of changes in hedging positions by Israeli financial institutions invested in US markets. Because of these hedging transactions, the shekel-dollar exchange rate closely correlates with the S&P 500 index. Following the sharp falls at the end of last week in New York, the shekel-dollar exchange rate is duly up 0.78%, in comparison with Fridays' representative rate, at NIS 3.3430/$. Against the euro, the shekel exchange rate is up 0.48%, at NIS 3.5297/€.

Published by Globes, Israel business news - en.globes.co.il - on May 2, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Shekel Photo: Shutterstock Vladirina 32
Shekel Photo: Shutterstock Vladirina 32
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