Power to the Shekel: Israel’s Currency Is One of the World’s Strongest, Again

Annual economic growth topping 3 percent and a low debt-to-GDP ratio of 61 percent can’t help but impress, even if slower global growth is set to take a slight toll in Israel

A woman holding a fan of money of Israeli New Shekels the new shekel series
Jenya Pavlovski / Getty Images I

After two years of stagnation, the shekel is one of the world’s strongest currencies again, a sign of the Israeli economy’s resilience.

Since the beginning of 2019, the shekel has gained an unusually high 6% against the basket of currencies against which it is measured, which includes the currencies of Israel’s main trading partners.

The shekel has also been boosted by a 7% fall by the euro, which is trading at a two-year low of 3.98 shekels, and by the dollar’s 4.6% fall to 3.57 shekels.

The shekel charged ahead between 2007 and 2017; during that period, Israel’s central bank launched aggressive foreign currency purchases, soaking up some $120 billion in an attempt to weaken the shekel.

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The currency’s gains halted in 2017, mainly due to interest rate increases in the United States, but the trend has changed again this year.

There are several factors behind the shekel’s long-term gains, the biggest being the Israeli economy’s strength, including GDP growth topping 3% a year, unemployment at a low of 4%, a low debt-to-GDP ratio of 61%, and improvements in the country’s sovereign debt rating. Other factors include an end to the uncertainty during this year's election campaign, and the relative quiet in the south despite the occasional clashes with Hamas and other factions in Gaza.

On Monday, the Bank of Israel left Israel’s representative interest rate unchanged at 0.25%, mentioning the shekel’s strength against other currencies. This, including the 1.2% gain against other currencies since the previous interest rate decision, is the main factor keeping inflation down, which in turn keeps the bank from raising interest rates.

Capital market sources cite several factors behind the shekel’s strength this year. One is a change in investment strategy by institutional investors. In 2018, Israel’s institutional investors bought some $7 billion to $8 billion in foreign currency, according to the Bank of Israel; in 2019, they changed tack, selling $3.6 billion worth in the first quarter.

Another factor is the success of Israel’s high-tech exports; the country’s trade surplus equals 3% of GDP.

OECD warns of global slowdown

On Tuesday, the Organization for Economic Cooperation and Development released a revised growth forecast, warning that a global economic slowdown may be on the way. The trend began at the end of last year and continued through the first half of 2019, it said.

The world economy is forecast to expand only 3.2% this year, following 3.5% growth in 2018, the OECD said in its new forecast. Growth in 2020 is expected to rebound to 3.4%; the organization has lowered its forecast several times in the past few months.

Regarding Israel, the OECD now predicts that growth will slow this year and next but remain strong at about 3% annually. The new OECD forecast puts growth for 2019 at 3.1% and for 2020 at 3.2%. As of last year, the OECD had forecast the figure for 2019 at 3.5% or 3.6%.

The OECD added that the global slowdown will weigh on Israeli exports in the short term, with local demand driving the economy. It predicted that Israel will have to raise interest rates in response, adding that the new government will need to improve the public sector’s efficiency.