The headquarters of Israel's central bank in Jerusalem, Aug. 19, 2013.
Bank of Israel headquarters in Jerusalem. Photo by Bloomberg
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Even as Operation Protective Edge marked its 17th day on Thursday, wreaking havoc on Israel’s economy, the euro fell to a 12-year low against the shekel amid concerns that tougher global sanctions against Russia would weigh on Europe’s fragile economic recovery.

The euro weakened 0.23% to a Bank of Israel rate of 4.5837 shekels, its lowest level since September 2002. The dollar also fell by 0.26% against the Israeli currency to 3.402 shekels, marking a steady appreciation of the shekel since the warfare in the Gaza Strip began, two and a half weeks ago. In late trading both currencies recovered part of their earlier losses, with the euro at 4.5943 and the dollar at 3.4116 at about 7:30 P.M.

European Union officials met on Thursday to consider targeting state-owned Russian banks and their ability to finance Moscow’s faltering economy, in what would be the organization’s harshest serious sanctions yet over the Ukraine crisis.

“The expansive monetary policy being implemented in Europe supports the weakening of the euro against the dollar with the euro weakening below its low point of November 2013. In addition,an excess supply of foreign currency in the local market and the talk of a cease-fire are contributing to the rise of the shekel. Both these things have created a scissor movement that is causing a fall of the shekel-euro rate,” said Yossi Fraiman, the CEO of Prico Risk Management & Investments.

The euro fell to an eight-month low of $1.3448 in early European trading Thursday before rebounding to a session high of $1.34855, but Fraiman warned that the greenback’s strength would do little to help an overly muscular shekel. “Without action on the part of the Bank of Israel, the dollar will continue to weaken locally despite its strengthening against the euro,” he said.

The shekel has been appreciating against the two currencies even as fighting between Israel and Hamas is causing Israeli factories to reduce shifts and led many foreign airlines to suspend flights this week. Manufacturers have long complained that the strong shekel makes their exports less price-competitive, an issue that arose again on Thursday.

Zvi Oren, president of the Manufacturers Association of Israel, on Thursday called on the government and the Bank of Israel to immediately lower interest rates and set a minimal exchange rate for the shekel. The organization estimates that Israeli industry lost out on some $2 billion in sales last year because of the strong shekel.

Zvi Eckstein, dean of the school of economics at the Interdisciplinary Center in Herzliya and a former deputy governor of the Bank of Israel, told the association this week that a minimum exchange rate should be set at between 3.3 shekels and 3.4 shekels to the dollar, which the central bank should be obligated to defend. The industrialists’ group itself favors an exchange rate of around 3.8 shekels, to benefit exporters.

Fraiman said he didn’t expect the Bank of Israel to act until the dollar reached the range of 3.38 shekels to 3.40 shekels.

Currency trader FXCM said on Thursday that could easily happen. It said that in the event of an eventual cease-fire between Israel and Hamas, “The markets will react positively and we’ll likely see more upward pressure on the shekel,” adding that the dollar would likely fall below 3.40 shekels.