Israeli Shekel Hits 14-month High Against U.S. Dollar

Economist magazine's Big Mac index shows shekel still undervalued.

The U.S. dollar continued its slide against the shekel on Friday. The representative rate of the greenback was set at NIS 3.682, for a 1.25% loss in one day and a 14-month low.

Such a sharp change in one day is unusual in foreign currency trading. Thursday’s representative rate was NIS 3.728.

The shekel also strengthened against other major currencies Friday. The euro declined from a value of NIS 5.053 on Thursday to NIS 5.027 Friday, but the euro’s value has been an entirely different story as it had just registered a record high value for the past year. The British pound weakened from NIS 5.886 on Thursday to NIS 5.843 Friday. Union Bank ascribed the strength of the euro to a revival of European economies that, other than unemployment, has been seen over the second half of 2012 and has also continued from last year into 2013.

Bank Leumi predicted that the shekel would continue to strengthen against major world currencies in the near term. Countervailing geopolitical risks, however, could act to depress the shekel’s value, the bank noted.

Buttressing the outlook for a stronger shekel, in a way, is the Economist magazine’s so-called Big Mac index, which attempts to measure the true value of a country’s currency by comparing how much it costs to buy the same McDonald’s hamburger around the world. Based on that measure, the Israeli shekel is still trading at about 10% less than its fair value against the dollar.

Although there is arguably a range of factors that affect the price of Big Macs around the world other than the strength of the local currency, the magazine’s index indicates that, unlike the shekel, the currencies of Canada, Australia, Switzerland, Norway and Brazil are trading above their fair market values based on the local price of the Big Mac.

The euro was found to be trading at 12% above its fair market value against the dollar, according to the hamburger price index, while the South African rand was among the currencies trading at well below its fair value.

The Big Mac index is not considered a precise barometer of a currency’s value in part because it is based on the price of just one product, and that product is also not a basic commodity.

The American currency suffered a decline against most major currencies last week, against an apparent increase in the appetite for risk in the financial community. When it comes to the shekel-dollar rate, Joseph Fraiman CEO of the Bnei Brak-based Prico group said the large supply of foreign currency at the beginning of the calendar month also contributed to the strengthening of the shekel. “Supply which resulted, for example, from wage payments motivated many exporters to act early and convert dollars into shekels, which created a major oversupply [of dollars] and led to the unusual rise in value of the shekel,” he said.

The drop in the value of the dollar on Friday was consistent with trading in the dollar over the past week around the world, Fraiman noted, but that had not been reflected in the value of the shekel until the end of the week. “The weakness of the dollar seen last week against the euro, the pound and the Swiss franc were not reflected in the local market due to local events, including the announcement of the resignation [to take effect at the end of June] of Bank of Israel Governor Stanley Fischer, the tension on the northern border and the demand from energy companies,” he said.

The more the decline of the dollar continues, the more the prospect grows that the Bank of Israel will again intervene in the currency markets by buying up foreign currency.

In its prior interest rate decisions, the central bank has already hinted at the possibility that it would buy dollars in the future to support the value of the dollar against the shekel. If such a step is taken, it would be an effort by the central bank to help exporters.

A stronger dollar makes Israeli exports priced in dollars more attractive by making them cheaper in dollar terms.
 

Moti Kimche