Dollar’s Surge Versus Shekel Sparked by $842m Purchase by Energy Group

The dollar is still down 7.8% on the Israeli currency this year; the Bank of Israel isn't expected to raise interest rates anytime soon

U.S. one-hundred-dollar bills.
Kim Hong-Ji / Reuters

The dollar’s sudden surge against the shekel starting late Monday was caused by two big energy companies linked to energy magnate Yitzhak Tshuva, involving the conversion of some 3 billion shekels ($842 million) into greenbacks, sources told TheMarker.

The energy firms are Navitas Petroleum, controlled by Gideon Tadmor, and Tamar Petroleum, which is indirectly controlled by Tshuva, the controlling shareholder of the Delek Group. Tadmor previously headed Delek’s energy operations.

The shekel had strengthened considerably against the dollar this year, causing concern among Israeli exporters whose products became more expensive in dollar terms. In late June, the dollar dropped to a three-year low at 3.49 shekels.

The conversion that boosted the dollar this week came from about 500 million shekels that Navitas raised last week through a bond offering designed to finance oil production in the Gulf of Mexico. Also, there was about 2.3 billion shekels that Tamar Petroleum raised in a major bond offering about two weeks ago.

That offering was arranged to acquire rights to the Tamar natural gas production site off Israel’s coast. The Tamar site was developed in part by Delek Group subsidiaries.

On Tuesday the shekel tumbled against the euro as well as the dollar, as the two currencies extended gains from Monday. By the end of the formal trading day Tuesday, the euro had gained 1.33% to a representative rate of 4.1198 shekels, while the dollar had risen 0.56% to a representative rate of 3.5650 shekels.

With the gains of this week, the dollar is still worth 7.8% less in shekel terms than it was at the beginning of the year. The euro is actually worth 0.5% more in that period.

At a meeting with industrialists on July 6, just after the dollar fell to 3.49 shekels, Economy and Industry Minister Eli Cohen confirmed that the government was allocating $1.5 billion to weaken the shekel through hedge transactions on government debt.

This comes on top of the foreign-currency purchases that the Bank of Israel has been making as it intervenes in the market. This week Cohen confirmed to TheMarker that Finance Minister Moshe Kahlon had approved the  $1.5 billion commitment.

Asked whether the Finance Ministry had intervened over the past week and a half, Cohen said the policy was not to disclose specifics about “how we purchase and what we purchase, but [we] intervene when we need to.” Cohen noted that the shekel’s value has implications for consumers as well as exporters.

Apart from the sale of shekels by Navitas Petroleum and Tamar Petroleum, the currency’s decline this week came against the backdrop of Israeli economic data supporting the assumption that Israeli interest rates would remain low. Higher interest rates tend to create demand for a currency.

June’s consumer price index, released on Friday, was unexpectedly low and reflected a 0.2% drop in prices over the past 12 months. The latest numbers seem to have delayed any prospect that the central bank will raise interest rates anytime soon, and a widening gap between Israeli rates and those in Europe and the United States could help keep the shekel weaker after this week’s fall.

“Unlike what we’ve gotten used to over the past year, in which the shekel has been one of the strongest currencies in the world, over the past week the situation has totally turned around,” said Lior Faust, who heads the foreign-currency desk at Leumi Capital Markets. “Since Friday, it has been the only currency that has actually weakened against the dollar.”

Faust said the explanation for the shekel’s weakness could be summed up in one word – divergence – meaning divergent policies between the Bank of Israel, which intends to keep interest rates low and even intervene in the currency markets – in contrast to policies at major central banks around the world. Faust cited not only the U.S. Federal Reserve but also the European Central Bank and the central banks of Canada and Britain as institutions perceived as showing a readiness to raise rates.

Faust noted that Bank of Israel Governor Karnit Flug recently said she would leave interest rates low even after other central banks raised them. That comment along with Friday’s surprisingly low consumer price data is set to help widen the interest rate gap between Israel and the United States even further, setting the stage for weak demand for the shekel, Faust said.

Yaniv Hevron, the chief economist at the Excellence Investments, called Friday’s inflation data “one of the most surprising indexes that we’ve seen in recent years.” He agreed that for the foreseeable future the Bank of Israel would leave interest rates unchanged.