It wasn’t too long ago that economists, businesspeople and officials were fretting over the strength of the shekel. Since the start of the year, the dollar had lost about 2.1% against the Israeli currency and Israeli exports were feeling the pain.
Suddenly, all that has changed. Over the last four days, the dollar has appreciated 2.4% against the shekel and the euro has gained even more, or 2.8%. The dollar’s upward thrust lost some of its momentum on Thursday, adding 0.1% to its value to a Bank of Israel rate of 3.8830. But the euro strengthened another 1.4% to 4.3426.
What’s changed are two factors, one pushing the dollar higher worldwide and the other pushing the shekel lower.
The first is growing speculation that the U.S. Federal Reserve is about to raise interest rates from their record lows, a move that would make holding dollars more attractive. Some of the dollar’s sheen has worn off since late on Wednesday, after minutes from the U.S. Federal Reserve’s July meeting left uncertainty over the timing of an interest rate hike.
“The protocol again reflected hesitation on the part of decision-makers, who stressed that conditions were still not ripe for a rate rise,” said currency trader FXCM. “As a result, it appears the changes of a rate increase in September have been reduced somewhat. Still the market believes a rate rise will be made later this year.”
The second factor is in Israel. Early in the week, the Central Bureau of Statistics released preliminary data showing the economy had grown at just an 0.3% annual rate in the second quarter, the slowest pace in at least four years, not counting last summer when much of the economy was brought to a standstill by Operation Protective Edge. Worryingly, not only were exports down but consumer spending, which has been the main economic driver, barely grew.
Worries about the economy were reinforced by a Bank of Israel inflation forecaster’s survey that pointed to an 0.7% rise in consumer prices over the next 12 months, a very low rate and below the government’s target of 1% to 3%.
At FXCM, the view is Israeli weakness is the more critical factor than the dollar’s strength.
“We haven’t seen a rise in the dollar like that anywhere else in the world in the last week, so we have to attribute the increase in the exchange rate, mainly to the weakness of the shekel against the background of disappointing growth and inflation figures, which have badly hurt sentiment toward the Israeli economy,” it said.
Sagi Stroumza, head of investments at the investment house Top Alpha, noted that only last June Bank of Israel Governor Karnit Flug effectively ruled out any further interest rate cuts or undertaking so-called quantitative easing measures.
“Right now the odds of a rate rise later this year have fallen a lot,” he said.
“We can assume that if the weak growth continues and the inflationary environment remains moderate, the Bank of Israel will forced to weigh expansionary steps, like cutting interest rates to negative and QE moves by buying government bonds and continued massive intervention in the forex market.”