Dollar, Euro Touch New Lows Against Shekel, With Pound at 25-year Nadir

Israeli currency’s strength may forestall a rate hike and force the central bank to return to market intervention

Israeli shekel bank notes.
Emil Salman

The dollar and the euro fell to their lowest levels in one or two years against the shekel Tuesday, as foreign currency markets readied for what is expected to be the first in a series of interest rates cut by the Federal Reserve, the central bank of the United States.

The dollar lost more than 0.7% to the shekel to a representative rate of 3.50 shekels, the lowest in a year. In after-hours trading, the greenback weakened further to 3.4937. The euro declined over 0.5% to 3.9015 shekels, a two-year low. During trading Tuesday it fell as low as 3.8932 and in after-hours trading was at 3.8957.

The pound sterling, which touched a 25-year low against the shekel Monday, dropped further Tuesday, tumbling nearly 2% to 4.2607 shekels. The pound has been weighed down by Brexit fears since Boris Johnson was named prime minster last week.

The shekel has been gaining ground for some time, but analysts attributed its latest gains to the global trends in interest rates. While the United States and Europe are moving to cut rates, the Bank of Israel has signaled plans to raise its rates. That would encourage more capital to flow into Israel and spur demand for the shekel.

The Fed is expected to lower rates when its two-day policy meeting ends Wednesday. Money markets are convinced the Fed will cut its key benchmark rate 25 basis points, to between 2% and 2.25%.

Going forward, it remains to be seen whether this will be a one-off cut. Analysts from Bank of America Merrill Lynch expect the Fed to guide on Wednesday toward more “insurance cuts” in the coming meetings, which essentially means taking preventive measures by cutting rates “in the face of high uncertainties and a cloudy outlook,” they said in a note to clients.

Nearly three cuts are priced in the money markets by the end of this year.

Last week, the European Central Bank said it expected its key interest rates to remain “at their present or lower levels” at least through the first half of 2020, suggesting a rate cut could be on the horizon.

That contrasts with the Bank of Israel, whose research department has forecast three rate increases from the current rate of 0.25% by the end of 2020. Ofer Klein, chief economist at Harel Insurance and Finance, said prospects for a rate hike in Israel anytime soon were growing dimmer in part because it would only strengthen the shekel further.

“We believe that the renewed global trend toward lower interest rates has been supporting a stronger shekel,” he said. “That, together with the low consumer price index, will prevent the Bank of Israel from raising rates in the coming months. In addition, we see the Bank of Israel returning to its policy of intervening in the foreign currency market soon.”

Israel’s consumer price index fell 0.6% in June, a much bigger fall than economists’ forecasts of 0.2%-0.4%. The June CPI cut inflation for the past 12 months to 0.8%, below the government’s annual target range of 1%-3%.

The central bank left its base lending rate at 0.25% earlier this month, the sixth straight time it has opted to keep the rate at this level.

Longer term, a host of factors have worked to the shekel to new heights. (It gained 7% against the Bank of Israel’s basket of currencies since the start of 2019). Among them is Israel’s persistently strong economy: Gross domestic product for the first quarter was recently raised upward to a 5% annual rate while unemployment is under 4% and the country’s debt-to-GDP ratio is a low 61%.

Meanwhile, Israel’s high-tech sector continues to attract huge amounts of foreign capital through foreign investment in startups and existing companies. The IVC Research Center, which tracks Israel’s high-tech industry, reported last week that Israeli startups raised $2.32 billion in the second quarter, the highest three-month total since 2013.

Even a second general election in September and the risk of further political stalemate have done little to deter investors.