Dollar Weakens Amid Expectations of Truce

Cease-fire unravels quickly but global conditions likely to undermine greenback further, traders say.

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Israeli soldiers next to an armored personnel carrier near the Gaza border, July 15, 2014.Credit: AFP

The dollar took a tumble against the shekel on Tuesday to reach its lowest in close to three years as exporters stocked up on the Israeli currency to meet tax payments. Signs of a cease-fire ending the eight days of fighting between Israel and Hamas also strengthened the shekel.

The U.S. currency weakened more than 0.5% against the shekel to a Bank of Israel rate of 3.4050, its weakest since July 27, 2011. The euro lost even more – close to 0.8% to a Bank of Israel rate of 4.6298. But both currencies clawed back some of their losses in late trading as the cease-fire failed to take hold.

The dollar was trading at 3.597 in early evening on Tuesday and the euro at 4.630. The shekel has appreciated some 5.3% on the dollar in the past year.

“During Protective Edge the dollar traded almost unchanged in a range of 3.42 to 3.44. The market was waiting for news from the front – either a cease-fire or ground incursion. When Israel said it was observing a cease-fire, the dollar resumed its pre-war weakness,” Ofakim, a trading house, said in a comment.

Even with the cease-fire in tatter for now, other factors played in the greenback’s weakness. Yossi Fraiman, CEO of Prico Risk Management, said there was an excess supply of foreign currency in the market Tuesday as exporters changed their dollar receipts into shekels to meet monthly tax payments.

“We believe that at around the 3.40 level the Bank of Israel will intervene in trading in order to mitigate the volatility and prevent a slide into the slippery slope downward as it did in the summer of 2011,” Fraiman said.

The central bank intervened twice at the end of June, buying as much as $800 million in dollars. In addition, the Finance Ministry conducted hedging deals involving dollar purchases.

Ofakim said concerns that the shekel would touch a new low may have prompted exports to accumulate shekels early. “From talks with clients it appears the market doesn’t believe anything will stop the continued weakness of the dollar,” it said.

The shekel has also been given a boost by Israel’s strong economic data, which don’t seem to have been affected by the fighting with Hamas, and Israel’s relatively high rates of interest.

“The fleeing to safe harbors that has contributed to the strengthening of the Japanese yen, the Swiss franc and other high-interest-rate currencies like the Australian and New Zealand dollar have also acted locally where investors see the shekel reflecting the good macro-economic figures from the Israeli economy,” it said.

That trend has been exacerbated by record highs in the U.S. stock market, prompting investors to seek the highest yield possible in fixed-income markets.

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