Israel | Shelter from the declines in the markets? The dollar is climbing, and even the shekel is no longer immune

The expectation of a tightening of monetary policy by the Fed has led to the strengthening of the world dollar at its highest level since 2002. In addition to the expectation of a US interest rate hike, the dollar, considered a safe haven in times of crisis, has benefited from Ukraine’s war.

Against the shekel, the dollar strengthened on Wednesday to NIS 3.4 – a level not seen since November 2020. Since the beginning of the year, the shekel has depreciated by 7.8% against the dollar, and depreciated by 4.4% only in April. Against the currency basket, the shekel has weakened by only 2.7% since the beginning of the year, indicating that the declines in the markets were the main cause of the recent weakening. Thus, a move that tried to provide the Bank of Israel last year when it purchased $ 35 billion in the market, has been due on the thumb side since the beginning of the year.

The recent weakening of the shekel against the dollar was due to the strengthening of the world dollar against the background of Fed Powell chairman’s hawkish statements that the US Federal Reserve should raise interest rates quickly in order to mitigate inflationary pressures. There has been a significant share of the weakening of the shekel against the dollar. Along with interest rate differentials, financial markets have seen sharp declines since the beginning of the year. Thus, the supply of dollars in the domestic market is small and the value of the dollar rises against the shekel.

And what about the sequel? The strengthening of the dollar may continue in light of the increase in uncertainty in the Ukraine sector and the Fed’s willingness to fight inflation. As for the domestic market, it seems that market volatility will dictate the tone, as the path of Fed interest rates is paved upwards. Bank Hapoalim economists believe that the basic factors that support a strong shekel have not changed, but in the short term the effect of share prices is dominant and affects the direction of the exchange rate.

The bank’s economists raised the annual inflation forecast to 2.9% against the background of the devaluation created, and in view of the rise in the price of oil. The strong shekel halted the price increases of imported inflation, and its weakness moderated the effect enjoyed by the economy as a result of the strengthening of the shekel. The rate of inflation in the economy reached 3.5% in March – above the Bank of Israel’s target.

By Editor

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