The shekel is gaining strongly against the world’s major currencies, especially the US dollar, after the US Federal Reserve kept the interest rate unchanged at 5.5% yesterday. In afternoon inter-bank trading, the shekel is 2.39% lower against the dollar at NIS 3.593/$ and 1.72% lower against the euro at NIS 3.922/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.354% from Tuesday, at NIS 3.681/$, and the representative shekel-euro rate was set 0.244% higher at NIS 3.990/€.
BDO chief economist Chen Herzog explains that before the Fed rate decision, the concern on the markets was that due to the high inflation data, the Fed’s forecast for the interest rate path in the US might change. The uncertainty on the markets, says Herzog, caused the dollar to weaken against the shekel.
Bank Leumi head of markets strategy Kobby Levi explains that in response to the decision, Wall Street rallied with the S&P 500 Index breaking through 5,200 points. He adds, “The dollar recorded a depreciation in value against all the currencies of the ten largest economies, especially against the euro.” The depreciation of the dollar against the Israeli currency, Levi observes, is most evident with the shekel-dollar rate trading around NIS 3.60/$ compared with an average rate of NIS 3.66/$ in the previous two trading days.
He adds, “The peak in the depreciation of the dollar came after US Federal Reserve chair Jerome Powell said in his address after keeping the rate unchanged that the reduction of the Fed’s balance sheet will occur at some point soon, and the interest rate has reached a peak and will decline from here on at some stage in the coming year.
The future trend depends on local developments
The sharp volatility of the shekel derives today from international factors, in contrast to the recent period when there has been volatility due to local factors and uncertainty, which resulted in the shekel exchange rate weakening sharply around NIS 3.65/$. Instability of the shekel can undermine financial stability, an element that the Bank of Israel pays particular attention to, and has stressed its importance many times, especially since the start of the war. These fluctuations in the market can tip the scales in the decisions of the Bank of Israel, and moderate the outline of reducing monetary restraint.
Looking ahead, Herzog explains that the influences on the shekel will continue to come mainly from the local market with, “Future developments in the exchange rate depending on geopolitical developments, the ability to move forward with a hostage agreement, and the fiscal responsibility of the government.” Herzog emphasizes that exceeding the budget deficit target, as appears to be the case according to the latest Ministry of Finance data, could lead to risks of downgrading, increasing the risk premium and weakening the currency.
Published by Globes, Israel business news – en.globes.co.il – on March 21, 2024.
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