Governor Stanley Fischer of the Bank of Israel, which lowered interest rates for July.
Governor Stanley Fischer of the Bank of Israel, which lowered interest rates for July. Photo by Olivier Fitoussi
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The U.S. dollar has hit a three-year high, reaching NIS 3.947 on Wednesday and closing the week a bit lower at NIS 3.923.

The rise in the dollar's value against the shekel in recent months is primarily the result of the greenback's increased strength in the international currency market, and of local developments such as last Monday's announcement by the Bank of Israel that it was reducing the interest rate for July, and Prime Minister Benjamin Netanyahu's decision to raise next year's budget deficit target from from 1.5 percent of gross domestic product to three percent.

The recent devaluation of the shekel against the dollar is good news for Israeli exporters because it means they can charge overseas customers fewer dollars for the same shekel price, making them more competitive again after years in which exports suffered due to the dollar's low value. Israelis with investments abroad that are priced in dollars will also benefit.

In the years when the dollar was weak, Israeli exporters, especially high-tech firms, urged placing limits on the shekel's fluctuation even proposed pegging the Israeli currency at NIS 4 to the dollar or higher. They also demanded hundreds of millions of shekels in export assistance, arguing that the strong shekel not only hurt their competitiveness but even forced some of them to sell at a loss to retain customers.

The Manufacturers Association said that while the shekel devaluation helps exporters during the current global economic stagnation, the exchange rate is just one component affecting the competitiveness of Israeli exports.

On the other hand, the drop in the shekel's value is not welcomed by importers or individual consumers who buy imported products and end up having to shell out more shekels. One major imported product, gasoline, for which the government sets a maximum retail price, declined in price at midnight last night following a decline in world oil prices that more than offset the rise in dollar's value. (See further coverage on this page. )

As the dollar has strengthened around the world, stock markets in economically advanced countries have generally slumped. The widespread sense is that the dollar will continue to show strength against the backdrop of continued uncertainty regarding European economies. Israeli economic experts expect the dollar to hit the NIS 4 level or even break it. They also say the Bank of Israel could take advantage of the dollar's strength and sell a portion of its $77 billion mountain of foreign currency.

"In the [outgoing] tourism sector, we still are not feeling the effect of the increase in the dollar on demand and reservations for summer vacations," said Yossi Fattal, CEO of the Israel Tourist and Travel Agents Association. Yoram Mutay, who heads Aviation Links Ltd. (Kishrei Te'ufa ) tourism agency, acknowledged that dollar-denominated travel packages are becoming more expensive in shekel terms, but said this has not caused a significant drop in demand.

Ronen Carasso, vice president for marketing at Issta travel agency, said the dollar's strength has led Israelis who have booked vacations abroad to offer to pay for them in full out of concern that the price, geared to the dollar's value, will rise later.