The drop in the shekel against the dollar since the end of July has gladdened the hearts of Israel’s exporters, but will consumer pay the price in the form of higher prices in stores?
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Ori Greenfeld, chief economist at financial services firm Psagot Investment House, says he doubts it, citing the U.S. currency’s smaller role in Israel’s economy today than a decade ago and a host of other factors unrelated to the exchange rate.
The dollar appreciated sharply against the shekel on Monday, adding close to 0.8% to its value to a Bank of Israel rate of 3.6860, bringing its gains in the past eight weeks to about 7.5% and its highest against the shekel since July 2013. The euro, by comparison, weakened 0.65% to 4.6818 shekels.
Currency trader FXCM attributed the sharp rise for the dollar to the Israeli currency’s adjustment to world market conditions after last week’s four-day weekend due to the Rosh Hashanah holiday. The agreement over the weekend between Finance Minister Yair Lapid and Prime Minister Benjamin Netanyahu ending a lengthy dispute over the 2015 failed to give the shekel support, even though it ended a cloud of uncertainty over the economy.
The dollar has now marked 11 weeks of gains against a basket of the world’s main currencies, its longest high run since the 1970s and a trend that suggest a fundamental change of direction. Currency dealers and economists say the dollar’s main strength derives from expectations that the U.S. economy is recovering — in particular in relation to a sagging Europe — and that as a result U.S. interest rates will begin climbing.
Local factors have contributed significantly to the shekel’s weakness. The protracted deliberations over next year’s national budget, disagreements over which were only resolved in the past few days, as well as back-to-back drops in the Bank of Israel’s base lending rate have made holding the Israeli currency less attractive.
The base lending rate is now 0.25%, a drop of half a percentage point since July and the lowest ever in Israel’s history.
The fact that Wall Street has touched record highs at the same time the dollar is strengthening is evidence of the dollar’s changing status as a currency that offered little or no yields to one that promises future returns. The weakness of the euro and other European currencies, as well as the yen, have enhanced the dollar’s strength.
So far, the shekel’s weakness hasn’t translated into inflation in Israel. The August consumer price index fell 0.1%, confounding economists’ consensus forecast of an increase of 0.2%. A Bank of Israel survey of forecasters’ projections for the next 12 months see the CPI at just 1.1% — near the bottom of the government’s target inflation rate.
Greenfeld said he doesn’t expect the shekel’s weakness against the dollar to have a pronounced effect either on consumers directly (in higher prices for imported goods) or indirectly (in higher costs for raw materials and other inputs used by local manufacturers). Not counting diamonds, which are in any case reported as polished stone, only about 11% of Israeli imports come from the United States, he said.
More than a third of imports come from Europe, but against the euro the shekel has only depreciated 2.8% in the past 11 weeks.
In the past the dollar exchange rate affected consumer prices because 95% of all residential leases were priced in the U.S. currency, as a hedge against shekel inflation. But with Israeli inflation stabilizing the practice has declined. According to Greenfeld, fewer than 2% of home rental contracts specify payment linked to the dollar exchange rate.
Moreover, he noted, energy prices — which are set in dollars, thereby giving the U.S. currency another way of affecting Israeli consumer prices — have been falling. The price of a barrel of benchmark Brent crude fell below $97 on Monday, close to the two-year low it hit last week.
A slowdown in economic growth is cooling consumer demand at a time when businesses are reluctant to pass on higher costs to their customers, Greenfeld said.
“We believe that public criticism and increased competition in some sectors will force manufacturers and retailers to absorb some of increases in import prices,” he said.