After the slide on the stock markets at the end of last week, following US President Donald Trump’s announcement of his tariffs program, the local foreign exchange market is undergoing a shake-up this morning. The shekel-dollar exchange rate is currently up by 1.68% in comparison with Friday's representative rate, at NIS 3.7933/$, while the shekel-euro rate is up by 1.87%, at NIS 4.1672/€. On the Tel Aviv Stock Exchange, the Tel Aviv 35 Index is down by nearly 3%.
How will Trump’s tariffs reform affect the dollar? It seems that the markets are confused. In the past few months, the DXY US dollar index, which tracks the strength of the dollar against a basket of currencies of major US trading partners, has weakened considerably. At one point on Friday, it sank to a five-month low.
This trend corresponds to a rule of thumb on the market: raising tariffs is expected to make US goods imports, bought in foreign currency and sold in dollars, more expensive, while US exports become cheaper. In addition, if raising tariffs leads to higher inflation, this means that the purchasing power of the dollar is eroded, i.e., the US dollar becomes weaker.
Market sources explain, however, that in the long run the tariffs reform could support the dollar. Kobby Levi, foreign exchange and derivatives strategist at Bank Leumi, says that the tariffs will strengthen the dollar: "This is because of the rise in inflation that is expected to follow from the tariffs, and the narrowing of the deficit on the US current account. These factor are expected to support the dollar on different timescales," he says. In fact, later on Friday, the dollar did strengthen, and the DXY rose by almost 1%.
The representative shekel-dollar rate rose by 0.4% on Friday. Current events could impact the shekel from several directions. The main one is that, as stock indices on Wall Street fall, and the value of US securities held by Israeli financial institutions falls with them, the institutions need to rebalance their dollar exposure, and so they buy dollars. The result is a sharp weakening of the shekel against the dollar.
The security situation and political instability do also affect the shekel, but, as Levi explains: "If the markets continue to fall, we shall see the Israeli currency weaken as well. The financial institutions will need more and more dollars to serve as collateral if the capital market weakens, and that will lead to depreciation of the shekel."
Published by Globes, Israel business news - en.globes.co.il - on April 7, 2025.
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