As Dollar Hits 12-year Low Against the Shekel, Analysts Are Divided on What’s Next

Some see Israel's currency making more gains, but others say greenback is due for a comeback thanks to changing Fed policy and weak Israeli economy

Eran Azran
Eran Azran
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Press conference regarding economic preparedness in the wake of the coronavirus, March 11, 2020
Press conference regarding economic preparedness in the wake of the coronavirus, March 11, 2020Credit: Emil Salman
Eran Azran
Eran Azran

The dollar exchange rate last week crashed below a psychological barrier of 3.35 shekels, a level it hasn’t fallen to in 12 years. In response to the sudden, unexpected drop in the U.S. currency, the Bank of Israel purchased substantial amounts of dollars and stated that its forex market policies have not changed.

On Friday the U.S. dollar strengthened to a representative rate of 3.368, but Goldman Sachs predicted that greenback will yet lose ground against the shekel again. Analyst Zach Pandl also predicted on Sunday that the shekel will continue to strengthen even after it broke through the psychological barrier of 3.4 shekels to the dollar.

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Goldman said that even as the dollar weakened globally in the last few weeks, it had been hovering at about 3.4 shekels, “suggesting that the Bank of Israel was, at least for a brief period, creating something which resembled an FX floor versus the dollar, in turn begging the question about how sustainable such a policy may be in a broader dollar downtrend.”

Like his predecessors, Bank of Israel Governor Amir Yaron has sought over the last decade to weaken the shekel with the goal of helping local exporters to remain price competitive in overseas market and preserve jobs. Its policy of buying dollars has, as a result, swelled Israel’s foreign currency reserves to $160 billion.

Despite the central bank’s statement last week of no change in forex policy, Goldman Sachs said it appears that the Bank of Israel had in fact changed its policy.

“The fact that the Bank of Israel has allowed for USD/ILS to break through 3.40 suggests they recognize these forces as well, and points to risks of a grind lower in USD/ILS,” it concluded. Nevertheless, the “strengthening pressures on the currency are likely to remain” due to the structure of Israel’s economy, Goldman said.

At the start of this year, the dollar weakened 1.6% against the shekel while the euro strengthened by 3.5% to break through the 4-shekel barrier. Due to the U.S. currency’s weakening, the value of the Bank of Israel’s currency basket, which is a weighted index of the currencies of Israel’s main trading partners, had dropped 2.2% so far this year. Although it has bounced off its low in July, it has not strengthened much. Over the last five years, the basket has dropped 18% against the shekel.

That said, the dollar’s weakness is not unique to the shekel. It reflects a general weakness against all major currencies in recent weeks due to the U.S. Federal Reserve’s extreme expansion policies, which include lowering interest rates and injecting vast amounts of money into credit markets to mitigate the economic impact of the coronavirus.

Alex Zabezhinsky, chief economist at the Israeli investment house Meitav Dash, stressed that the shekel’s gains last week were not exceptional. “Compared with other world currencies, the shekel did not stand out,” he said. “The change in the rate was entirely in line with the change in the dollar relative to the currency basket over the past year. Measured on this basis, the shekel hasn’t even strengthened enough.”

Nevertheless, in contrast to Goldman Sachs, Zabezhinsky holds that the Israeli currency won’t continue to strengthen. Rather, the dollar should rebound. “The shekel rate hinges mainly on the situation of the dollar globally. I believe that the weakening of the dollar won’t continue for long, so the potential for further shekel strengthening is likely to be limited,” he predicted.

Jonathan Katz, chief economist at Leader Capital Markets, shares the view that the pressures that have been undermining the dollar’s strength are likely to moderate. “The Federal Reserve has slowed its purchase of government bonds to a rate of $20 billion a week, after buying $350 billion at the peak of the [coronavirus] crisis,” said Katz.

“Therefore, the Fed’s balance sheet is stabilizing and has even shrunk somewhat due to loan repayments. The moderation in bond purchasing supports stabilization of the dollar in world markets, at least temporarily, and also an upward creep of U.S. government bond yields,” Katz said.

David Reznik, interest rate strategist at Leumi Capital Markets, and Kobi Levi, who manages its markets strategy desk, stress that the state of the Israeli economy will deter further strengthening of the shekel.

“Israel’s situation remains difficult. We face political and economic instability due to the difficulties we have had reducing the rate of [coronavirus] contagion and the possibility of an election in the next half year,” they wrote in a note. “So, the forces that have supported an appreciation of the shekel opposite the currency basket are weaker than they have been in the past. Apparently, the euro-shekel exchange rate is still much higher than its value before the coronavirus crisis (3.7 shekels per euro).”

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