The Shekel’s Weakness: More to Come?

Economists ascribe a 7% decline in the currency’s value to local and global factors that won't be going away quickly.

shekels
Reuters

To many, the last several weeks seem to be the beginning of a turnaround for the shekel. Since the end of July, the currency has lost some 7% of its value against the dollar, which on Tuesday reached 3.641, a 14-month high against the shekel.

Economists have ascribed much of the shekel’s weakness to the dollar’s strength globally. “The dollar hasn’t just appreciated against the shekel but against a range of currencies, first and foremost the euro. The shekel has lost more than most currencies but it is part of a general trend,” said Zvi Stepak of Meitav Dash.

Ori Greenfeld, chief economist at Psagot Investment House, traces the U.S. currency’s strength to expectations that the Federal Reserve will begin raising interest rates sooner than had been expected while the European Central Bank has embarked on a program of quantitative easing.

Since May, the euro has lost about 7% against the dollar, declining from $1.40 a euro to $1.29.

But the shekel has lost more than most currencies, and for that economists point to the two rate cuts the Bank of Israel took over the summer that left its base lending rate at a record low 0.25%.

“The governor of the Bank of Israel took everyone by surprise,” said Greenfeld. “No one expected that second rate reduction.”

Three years ago, the Bank of Israel rate stood at 3.25% at a time when the U.S. rate was a mere 0.25%. That meant investors could earn a lot more converting their money into shekels and buying Israeli government 10-year bonds than holding the equivalent in U.S. treasuries.

The last of that differential has evaporated in recent weeks, says Stepak. Indeed, two weeks ago, the yield on Israeli government bonds was for a while lower than it was on its American counterpart.

There are local factors contributing to the shekel’s weakness, too. They include the continued deterioration in Israeli exports, slowing economic growth and the damage caused by Operation Protective Edge. All in all, Israel Is looking less attractive to investors. Jonathan Katz, economist for Leader Capital Markets, says the downturn in exports has continued into the third quarter.

A weaker shekel would help repair some of the Israeli economy’s problem by making exports more competitively priced. Meitav said a dollar at 3.8 shekels — the equivalent of another 5% depreciation of the Israeli currency — would be “good for the economy, good for exporters and good for growth.”

Stepak also points to the current account, whose surplus amounted to 2.2% of gross domestic product in 2013. In this year’s first quarter it grew to $3.6 billion, but then declined sharply to $2.2 billion in the second and will probably continue to fall the rest of the year.

Leader Capital Markets expects the shekel’s weakness to continue. Greenfeld agrees, but he hinges that on the dollar’s behavior worldwide. At Meitav Dash, the feeling is the dollar’s strengthening trend has only begun.

“U.S. interest rates will start climbing long before they do in [economically] stagnant Europe. U.S. bonds pay a lot better than Germany, which stand at 1.5% today, and the gap will grow,” said a Meitav Dash report.