The dollar has strengthened against all the world's major currencies as well as the shekel in 2022 as the world's stock markets fell and investor sought a safe haven currency. The dollar's strength waned somewhat in the final few months of the year but it has still ended up 9% higher against the basket of major currencies this year and 10% higher against the shekel.
Bank Leumi head of markets strategy Kobby Levi explains that the main reason for the appreciation of the dollar against the shekel this year has been the strengthening of the dollar worldwide. "If you look at the shekel against the basket of currencies, it has maintained stability and continues to be a strong currency from an historical perspective. The US currency provides investors with security because it is seen as a safe haven asset in a time of rising inflation, market declines and a global recession."
Israel Discount Bank's macroeconomic department adds that the dollars has retained its status as a secure assets when other currencies have not. "Other financial assets recognized as safe havens, such as gold, the Japanese yen and the Swiss franc, have struggled to function as safe assets. As a result, the negative correlation of the dollar with the stock market has strengthened, and it functions as a hedging instrument against declines in stock markets," Another explanation provided by Discount Bank is that the damage to global economic activity also supported the strengthening of the dollar, because the US has been less affected by global events like the war in Ukraine and Covid in China.
"Added to all this is the high interest rate in the US, which produces a better yield than in other economies this year," says Levi. Discount Bank's macroeconomic department stresses that the increase in the dollar interest rate has been more rapid than in other developed countries, resulting in the widening of the interest rate gap between the US and other countries. So the US dollar has become the safe haven currency carrying the highest yield.
The shekel has not stood out positively or negatively
"The shekel lost about 10% against the dollar this year. This is very significant in comparison to other periods," explains Levi. However, 2022 was exceptional in all financial markets, not only in the foreign exchange market, but also in stocks, bonds and more. Therefore, although what happened to the shekel-dollar exchange rate was a major change, it was not exceptional in relation to other financial assets.
"The shekel has depreciated against the dollar this year, but against the basket of other major currencies it has more or less maintained its strength," Levi explains, adding that in 2022 conditions were created that led to a balance between factors supporting appreciation of the shekel and supporting its devaluation.
Factors supporting the strengthening of the shekel included the current account surplus (more exports than imports) and the continued flow of foreign investment into Israel, both in direct investments and in financial investments.
The most significant factor causing the shekel's devaluation in 2022 was the decline in stock markets. "The result was that investors bought dollars at a fast pace in contrast to an average year when the markets achieve a positive return," says Levi.
The forecast: In 2023 you won't see more of the same
Pico Risk Management & Investments CEO Yossi Fraiman estimates that at least in the first half of 2023 - the dollar has the potential to strengthen against the shekel. His basic assumptions are that the war in Ukraine will continue and China will not yet return to full economic activity due to Covid. "On these assumptions, and due to the large amount of investments abroad by Israeli institutional investors, which will continue to be significant, in my opinion the activities of these institutions will continue to have a great impact on the local currency market, as they act to protect their investment portfolios."
In terms of the market, Fraiman does not see a "big game changer". According to him, if, for example, we were to assume that China returns to full activity, that would be enough to push oil prices over $100 per barrel and accelerate inflation. "As long as Covid is still around, fuel is expected to remain in the $60-90 dollars per barrel range," he explains. "Therefore, especially due to the slowdown in global economic activity, we do not expect unusual and new inflationary pressures from the raw materials side. The pressures are mainly from services and wages, the core of inflation, and this is definitely a significant parameter until we pass the inflation peak prevailing. If inflation stays high the central banks will maintain a high interest rates over time - and this will affect the stock market. Historically, an interest rate cut will boost the stock market, and the expectation is that this will not happen until the end of the third quarter." Consequently the dollar will maintain its strength against the shekel until the stock market recovers.
Fraiman expects the shekel-dollar exchange rate to range between NIS 3.30-3.70/$ in the first half of 2023. He explains, "The very large range is a result of the activities of the investment institutions abroad. The investment component of Israeli institutions abroad is worth over $100 billion dollars. When they want to be exposed to the performance of the capital markets, they neutralize the influence of the foreign exchange market. In this process, when there is a decrease in the value of the portfolio, there is a gap between the value of the portfolio and the value of the portfolio that needs to be hedged - and the adjustment to this is achieved by purchasing dollars. Therefore, when the stock market goes down, the institutions buy dollars, this affects the volume of demand for dollars in the local market. Looking ahead, to the third quarter, we need to prepare for the shekel to return to being a very strong currency."
Discount Bank also estimates that the strengthening the dollar will not continue throughout 2023. "The widening of the interest rate gap has been weakened, due to the approaching end of interest rate hikes in the US, and therefore this does not support the continued strengthening of the dollar."
At the same time, Discount Bank notes that continued uncertainty, due to recessionary fears and stock market volatility in the first half of 2023, will affect the dollar exchange rate, with declines in the capital markets supporting the strengthening of the dollar globally, and vice versa.
Leumi's Levi thinks that the weakening of the dollar worldwide this month augurs what is expected next year. "The dollar has weakened significantly this month in relation to the basket of currencies, and also against the shekel. Most forecasters estimate that the dollar will continue to depreciate.
Published by Globes, Israel business news - en.globes.co.il - on December 22, 2022.
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