Concern in Israel about the dramatic strengthening of the dollar against the shekel exists not only among the leaders of the economy, but among every Israeli citizen who purchases in the supermarket, flies abroad or wants to buy a car. The rise of the US currency towards NIS 4 to the dollar could have a dramatic impact on the cost of living for everyone in Israel.
The dollar's exchange rate closed yesterday at NIS 3.8610, but during the trading day the dollar jumped by nearly one percent, trading at NIS 3.8750, a seven-year high against the shekel. This comes after the US currency rose 0.4% on Tuesday. Towards the end of the trading day, the increase moderated, and the dollar traded at NIS 3.8530.
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Yesterday's increase is explained mainly by the strengthening of the dollar worldwide and the declines in various stock exchanges, but in the case of the dollar, its almost consistent rise since the beginning of the year is connected not only to economic events, but in many cases also to political events.
We'll pay more
The increase in the dollar exchange rate increases the price of products imported to Israel, the prices of vacations abroad, and the price of fuel. It should be noted that the Ministry of Finance has been working over the past year and a half to moderate the increase in the price of gasoline, and in fact subsidized its price to the consumer by lowering the excise tax, so that during the period in question, Israeli drivers did not feel the rise of the dollar and oil in their pockets. These price increases increase inflationary pressures and ultimately increase the likelihood that the interest rate in the economy will rise again. The Bank of Israel's next decision on the interest rate will be made on October 23, and will be affected, inter alia, by the September Consumer Price Index, which will be published on October 15.
Delek // Photo: GettyImages (Illustrative),
It should be noted that the leading indices on the US stock exchanges have also been trading in a downward trend in recent weeks, causing institutional investors in Israel to buy more dollars in order to hedge exposure abroad. In the past month, the S&P index and the Nasdaq index have declined by about 6%.
Meanwhile, the euro also strengthened last night, trading up about 0.6 percent at NIS 4.056. Its representative exchange rate closed yesterday at a lower level of NIS 4.0480. It should be noted that on weekdays, trading in the foreign exchange market is thinner, which may cause higher volatility of currency rates. At the same time, the Tel Aviv Stock Exchange was painted red: the Tel Aviv 125 Index fell by 1.15%, and the Tel Aviv 35 Index weakened by 1%.
The euro has also become more expensive, Photo: Gettyimages
Concern over credit rating
Yossi Freiman, CEO of Frico Risk Management, Finance and Investments, explains, "The paucity of activity during the holiday, along with the concern of damage to Israel's credit rating, lead to a decline in the level of sensitivity and an increase in the potential for price fluctuations. Surplus demand pushes the dollar to NIS 3.88. In our assessment, a breach of this level will signal continued movement towards the level of NIS 4 to the dollar.
He added: "The exchange rate levels reflect, among other things, the strengthening of the dollar worldwide, among other things against the background of the economic slowdown in China and the increase in uncertainty regarding the continued interest rate increases in Europe. The stabilization of the dollar above the NIS 3.86-3.88 range indicates that market participants expect the government to continue its current policy and advance legal reform, even in the absence of broad consensus. Such a move is expected to harm the activity of foreign investors, reduce the supply of foreign currency, lead to the widening of the budget deficit, increase inflation, and increase the shekel interest rate in the medium and long terms."
Yossi Freiman,
As noted, the strengthening of the dollar in recent days is mainly attributed to its strengthening worldwide. However, one cannot ignore the reason that led the dollar to current levels, which is the advancing of the legal reform without broad consensus, which has led to a decline in foreign investment in high-tech in particular and in Israel in general, to increased exposure of institutional investors abroad, the removal of investment recommendations in Israel by international bodies, and more. All these, of course, contributed to the rise of the dollar against the shekel.
Windy markets
Kobi Levy, Head of the Market Strategy Desk at Bank Leumi: "The financial markets have been turbulent recently, mainly due to sharp changes in commodity prices, widening economic performance gaps between the large economies, multiple risks and uncertainty regarding the future, mainly against the background of rising yields in the US and expectations of changes in the interest rate in the US.
He added: "On Tuesday, stronger-than-expected US employment data pointed to continued tightening in the labour market and support continued inflationary pressures from the demand side. As a result, there was a further increase in investors' expectations for the interest rate next year. This change, in parallel with increased dollar debt raising to finance the deep deficit, supported the continued increase in yields. For example, 4-year yields in the US have already reached 80.30%, and the 2007-year Treasury yield rose above 5.00% today for the first time since <>."
Tel Aviv Stock Exchange (archive), photo: Coco
Levy adds that at the same time, there were declines in equity markets in the US and around the world. "Against this background, the dollar is strengthening, and with it the other 'haven' currencies – the Swiss franc and the Japanese yen. Therefore, most of the change in the dollar's exchange rate against the shekel derives from the strengthening of the dollar worldwide. Against the euro and the pound sterling, for example, the shekel maintains its value around 4.04 and 4.67, respectively, significantly lower than its value against them in August, when it traded at 4.15 and 4.85, respectively."
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