The dollar traded on Monday at its highest level against the shekel in more than a month as the U.S. Federal Reserve’s tapering of bond-buying and weakness in global stock markets boosted the Bank of Israel’s struggle against the strengthening shekel.
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The dollar shot up 0.7% to a Bank of Israel rate of 3.521 shekels, setting the month-plus record. In late trading, the U.S. currency was at 3.528 shekels. The euro strengthened against the shekel by 0.2% to 4.75 shekels even as it weakened against the dollar.
The dollar’s strength stems mostly from the weakness in global financial markets, particularly emerging markets, said Rafi Gozlan, chief economist at Leader Capital Markets. Over the past few weeks global shares have lost some $1.8 trillion in value, based on fears of an economic slowdown in China, the world’s second-largest economy, and the prospect of rising interest rates.
“The dollar is traditionally a safe haven, so in a period of unsteadiness or losses in the markets, investors around the world and in Israel rush to the U.S. currency,” he said.
The dollar’s gains against the shekel mirrored global trends as the euro hit a two-month low of $1.3476 on Monday, though it later recovered some ground to trade 0.1% higher at $1.3499.
Euro- zone inflation for January showed a worrying drop to 0.7% year-on-year, versus economists’ forecasts for a rise of 0.9%. The dollar fell to as low as 101.67 yen, its weakest level since early December, as a sharp sell-off in emerging currencies in recent days has supported the yen broadly.
The shekel’s recent weakness comes as welcome news for the Israeli economy, whose export competitiveness is highly reliant on the exchange rate. Exports have been sluggish in the past year and even showed a decline in December, a trend that businesspeople and many economists blame on the strong shekel for boosting exporters’ costs in dollars.
Gozlan said the Fed’s retreat from its bond-buying program was also supporting the dollar. The program, aimed at accelerating economic growth, included the massive printing of dollars to buy bonds, which in turn put pressure on the exchange rate. Now that the Fed decided last week to cut another $10 billion from its monthly purchases, reducing them to $65 billion, the greenback is being pushed higher.
Currency trader FXCM also cited the Bank of Israel’s recent large-scale purchases of foreign currency for the strengthening of the dollar against the shekel. Last week, the central bank signaled its intention to make itself felt in forex markets by buying close to $500 million in dollars.
“It has created a double effect that has achieved its technical goal of raising the exchange rate to above the range of 3.50-3.51 shekels,” said FXCM. “It will be interesting to see this week whether the Bank of Israel’s strategy deters speculators from trying to reverse the trend.”
The central bank was apparently prompted to move when the shekel strengthened to 3.483 shekels on January 24. Since then the dollar has gained about 1% on the Israeli currency. FXCM said that as long as the greenback stays above 3.50, the trend favors the Bank of Israel toward a strengthening of the dollar.
Another factor that may be weighing on the shekel, rather than pushing the dollar higher, is the threat of boycotts and sanctions against the Israeli economy, said Gozlan. He said a spate of announcements of boycott actions by European banks and pension funds, as well as the controversy around Scarlett Johansson’s appearance in an Israeli company’s ad campaign, had drawn attention to the boycott efforts and may have scared off some investors.
“While the market isn’t assigning much importance to it right now, if the boycott issue grows it could easily weaken the shekel,” Gozlan warned.
With reporting by Reuters