Bank of Israel Loses Control as Shekel Is Taken for a Ride

The dollar strengthens to four shekels as the euro slides in response to global developments.

Eran Azran
Eran Azran
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Israeli shekels are worth more in euro or dollar terms than for many years.Credit: Reuters
Eran Azran
Eran Azran

A shifting global economic environment reverberated in Israel on Monday, sending the dollar above four shekels for the first time in two and a half years and pushing the euro sharply lower.

The U.S. currency briefly touched 4.02 shekels, a gain of 1%, before settling at a Bank of Israel rate of 4.0170. The euro weakened by as much as 1.7% to a 12-year low of 4.35 shekels. At the end of the day it trimmed losses to about 1.4% and a Bank of Israel rate of 4.3697.

The dollar’s gains weren’t exclusive to the shekel. The yen, the Chinese yuan, the Swiss franc and the Brazilian real also weakened against the greenback. The DXY basket of six currencies against the dollar set a more-than-11-year record.

“In contrast to what happened over the previous two months, the changes on Monday in the shekel exchange rate were a global story, not a local one,” said Ori Greenfeld, chief economist at Psagot Investment House.

One reason behind the dollar’s strength was the very encouraging U.S. employment report released Friday, which showed unemployment at its lowest level since the 2008 recession. That prompted speculation that the Federal Reserve will begin raising interest rates as soon as the third quarter, or even sooner.

Meanwhile, investors are offloading the euro, which has been losing its attractiveness for many months. Over the weekend the European currency reached a 12-year low against the dollar of $1.08.

On Monday, the euro edged higher to $1.0866, but analysts say it won't be long before it reaches parity with the dollar.

That euro’s weakness is being exacerbated by the official start of the European Central Bank’s quantitative easing on Monday. The ECB’s 60-billion-euro-a-month program of bond buying with new money is aimed at boosting inflation and economic growth. There were also renewed fears of a Greek exit from the euro zone after Finance Minister Yanis Varoufakis spoke over the weekend about putting economic reform to a referendum vote.

Between August and December the shekel depreciated 11% against the dollar. But that has had little impact on the basket of currencies, a trade-weighted index the Bank of Israel uses to measure the effect exchange rates are having on Israel’s foreign trade. This is because the euro dropped about 10% since the middle of December.

Despite the volatility on Monday, the basket was little changed for the day at 84 points.

To try to solve the problem, the Bank of Israel made a surprise decision on February 23 to cut its base lending rate to 0.1%, its lowest level ever. While the public looks at the dollar, the central bank uses the basket to gauge the need for interest-rate adjustments.

Since the Bank of Israel lowered the March interest rate, the shekel has depreciated about 3%, but more recently it has been steadier, noted Jonathan Katz, an economist at Leader Capital Markets.

“The surprise rate reduction put the breaks on the sharp appreciation of the shekel against the basket, but the depreciation that followed has still been relatively modest,” added Rafi Gozlan, chief economist at Israel Brokerage & Investments.

If one discounts the rapid appreciation over the summer and the rapid depreciation that followed, the shekel is just 1.5% higher than it was in the first half of 2014, he said. All in all, say many economists, the Bank of Israel hasn’t been hugely successful in improving the exchange-rate environment for exporters and buttressing economic growth.

Now it will have to rely on developments in the United States and Europe.

“If the shekel keeps on strengthening over time, the Bank of Israel won’t be able to do much,” said Greenfeld. “Buying foreign currency and lowering the interest rate are tools that work in the short run only. At the end of the day, if the Israeli economy is growing at a good pace and exports improve, the shekel will strengthen and there’s not much the Bank of Israel can do about it.”

At UBS Wealth Management, the view is that the shekel will trade at around four to the dollar. But low inflation, an influx of foreign investment and a current-account surplus will probably leave the shekel stronger — at 3.85 to the dollar a year from now. The effect of the rate on the exchange rate is already over.

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