Shekel weakens sharply against US dollar

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

Declines on US stock markets are affecting the local foreign exchange market. Against the euro, the shekel is fairly steady.

Share prices fell sharply on US stock markets at the end of last week, while yields on US Treasury bonds shot up, and the US dollar started to strengthen. This morning, at the opening of foreign exchange trading, the shekel-dollar rate rose sharply, and it is currently up 1.36% in comparison with Friday’s representative rate, at NIS 3.4208/$.

By contrast, the shekel-euro rate is fairly stable, up 0.04%, at NIS 3.5843/€.

The US dollar has strengthened considerably against the Japanese yen, which reached a 24-year low against the dollar this morning. The gap between Japanese and US bond yields has widened, after US inflation figures sent dollar bond yields sharply higher.

Last month, the shekel-dollar rate reached NIS 3.46/$, a 20-month high. Among the reasons for the shekel’s weakness against the dollar is changes is hedging requirements on the part of Israeli investment institutions, which are highly exposed to overseas stocks, particularly in the US, as part of their management of the public’s savings. The institutions hedge their currency exposure on their US investments by buying shekels against the US dollar. When share prices fall on US markets, as they have done recently, the institutions’ dollar exposure falls accordingly, and they therefore reverse their hedging positions, and sell shekels against the dollar. The sharp rise in demand for dollars led to a shortage of dollars in the local market, causing the shekel-dollar rate to rise. The amounts involved are very large, sufficient to move the local foreign exchange market, hence the shekel-dollar rate is closely correlated with US stock indices.

The beneficiaries of the rise in the shekel-dollar exchange rate are those with salaries or revenue denominated in dollars while their expenses are in shekels: exporters, for example, who in recent years have needed support from the Bank of Israel, which bought dollars to the tune of $35 billion a year in order to moderate the appreciation of the shekel. The currency trend also to some extent offsets the losses of Israelis holding shares in the US.

Share prices on the Tel Aviv Stock Market are again weaker this morning, after yesterday's sharp falls. The Tel Aviv 35 Index is currently down 1.55%.

Investors are tensely awaiting the investment decision by the US Federal Reserve due to be announced on Wednesday at 21:00, Israel time. The market expects a rise of 50 basis points, although after the CPI reading published on Friday showing inflation running at an annual rate of 8.6% in the US, some analysts have revised their forecast and are now predicting a rise of 75 basis points.

In Israel, the CPI reading for May will be released on Wednesday. Analysts estimate that the CPI rose 0.8% last month. "That will raise the annual inflation rate to over 4%, more than double the midpoint of the 1-3% target range, which will oblige the Bank of Israel to respond," says Mizrahi Tefahot Bank head of research and investment Ronen Menachem.

Menachem points out that no less important than the Federal Reserve’s interest rate decision is its economic forecast: "In the previous forecast, the Fed estimated that GDP would grow 2.8% this year and that inflation would be 4.3%. Now, after a 1.5% decline in GDP in the first quarter and a 4% jump in the inflation rate since the beginning of the year to 8.6%, the new forecast will be changed unrecognizably, and will (probably) indicate lower growth and (certainly) higher inflation."

Published by Globes, Israel business news - - on June 13, 2022.

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

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