With Syria Jitters Dropping, Israel Looks Ahead to Further Gains Against Dollar

Analysts see shekel moving from strength to strength.

The prospect of a U.S. attack on Syria briefly weakened the shekel, but with the drums of war silenced for now, the Israeli currency is again moving from strength to strength, and that is unlikely to change any time soon.

Mounting expectations of an attack against the Syrian regime had previously lifted the U.S. dollar by as much as 4% against the shekel, to NIS 3.67, as part of a hedge against global economic turmoil. But as Washington pulled back from the idea – first when U.S. President Barack Obama said he would request congressional approval for an attack and then when Moscow proposed that Syria’s stock of chemical weapons be dismantled – the dollar fell back to its lowest level in more than two years.

Last week the U.S. Federal Reserve helped undermine the greenback further when it affirmed Wednesday that it wouldn't reduce its bond purchases. On Friday the greenback tumbled 0.9%, to NIS 3.5040.

Alex Zabezhinsky, chief economist at Meitav Dash Investment House, says the intensity of the shekel’s strength is somewhat unusual.

“Even when concerns about an attack on Syria were at their peak, the shekel showed strength relative to the declines suffered by other world currencies,” he said. “This might have been connected with one-time deals like the sale of [Israeli metalworking tool company] Iscar or other transactions that brought in large amounts of dollars but in my opinion it’s simply because the shekel cut loose a bit from economic forces.”

The extent of the dollar's rise and fall over the past three weeks isn’t unusual. Over the past year, lengthy declines have been followed by recoveries, at times aided by the Bank of Israel's aggressive intervention in the forex market.

Don’t be misled by the volatility, though. The dollar remains headed in one direction, and that’s downwards. The dollar has lost 10% of its value in the past year, having traded at NIS 3.91 last September.

Israeli policy makers worry that an overly strong shekel will undermine Israel’s competitiveness in the export industry. That was one reason the Bank of Israel announced earlier this year it would intervene in the foreign currency market on a regular basis in an effort to reverse, or at least mitigate, the trend.

But analysts aren’t convinced the dollar has reached its lowest point against the shekel. After examining Israel's balance of payments, Rafi Gozlan, chief economist at Israel Brokerage & Investments I.B.I., concluded that, barring any unforeseen events, the shekel will continue strengthening against the dollar over the next several months.

"An examination of the country's current and capital accounts produces a clear picture. The economy is generating an excess supply of foreign currency," said Gozlan. "On the one hand, there has been a decline in energy imports due to the start of natural gas production at the Tamar field, and on the other, there has been an increase in exports, particularly in the service sector, meaning high-tech. At the same time, there has been a sharp rise in foreign direct investment in Israel, with overseas investment by [Israeli] financial institutions only partly offsetting it."

Gozlan and Zabezhinsky say the forces working to strengthen the shekel will remain in effect until the Bank of Israel moves to lower its base lending rate or enters the forex market forcefully enough.

The winds of change might also blow in from Washington, in the form of the Fed’s stimulus policy. The markets know that sooner or later the Fed will curtail its bond purchases, which amount to a whopping $85 billion a month. Those purchases have not only helped stimulate U.S. economic growth by reducing the cost of capital to companies, but have also propped up the stock and bond markets. When the Fed halts the program – or before that, on the day when the markets see that happening at some definable point in the future – investors around the world will seek shelter in low-risk investment vehicles, starting with the dollar. This is likely to boost the dollar against foreign currencies around the world, including the shekel.

”So long as the Fed continues its program of quantitative easing, the U.S. currency will remain weak,” said Zabezhinsky. “Against that, if the stimulus program is reduced significantly, the dollar will move direction sharply. A slower, cautious reduction of purchases, by $10 billion or $20 billion a month, will have almost no impact.”

The high volatility in dollar trading over the past year has provided fertile ground for the activities of speculators who often exploit the Bank of Israel's intervention to make profits on currency movements. But it's not just speculators who can profit from the dollar's movements; ordinary investors can too.

Future declines in the dollar could offset gains from investments in the U.S. market or other dollar-denominated vehicles, so the currency exposure of any investment portfolio should be hedged, either by investing in mutual funds that lack any foreign currency exposure or by buying futures contracts. Several stock exchanges around the world offer shekel-dollar futures contracts, but the main drawback is that these contracts are difficult for ordinary investors to trade.

People drawn to risk could open a currency trading account with a forex trader operating in Israel or abroad. But to make large amounts of money in foreign currency trading involves a great deal of leveraging, which puts investors at risk for heavy losses.

Bloomberg