Market volatility: Will US dollar soar to NIS 3.90?

In a turbulent economic landscape, the Israeli shekel continues to weaken as the US dollar surges to new heights, crossing the 3.85 shekel mark. This marks a significant shift from the recent levels, and the trend shows no signs of abating.

This depreciation of the shekel is reflective of the economic and political instability currently plaguing Israel. According to a report by Citibank, the bank has profited significantly from its short position on the shekel against both the dollar and the euro. Citibank cited Israel's weaker long-term growth forecast due to a delicate political situation as a key factor driving increased demand for the greenback. The bank's outlook for the near future also suggests a higher foreign exchange rate.

With speculation about a potential compromise in regard to the judicial reform waning, Israel is grappling with a political crisis that has cast doubt on the stability of the nation's currency. And as the Supreme Court is preparing to review the “reasonableness” law that was passed by the Knesset, the uncertainty has only served to heighten market anxiety.

In the meantime, on the global stage, the US dollar has been strengthening, with the US dollar index (DXY) reaching a six-month high of 104 points. This surge in the dollar's value has been driven by a variety of factors, including soaring world oil prices and concerns that interest rates may remain high in the foreseeable future.

Ronan Menachem, Chief Economist at Bank Mizrahi Tefahot, spoke to Globes, highlighting that Israel's economic environment currently does not favor the shekel. According to Menachem, factors beyond the political crisis, such as declines on Wall Street, a growing deficit noted by the Ministry of Finance, sharp declines in high-tech investments, the presence of Moody's delegation in Israel, and apprehensions about an adverse report, all contribute to a negative sentiment surrounding the shekel.

Menachem also highlights the possibility of the Bank of Israel raising interest rates to counter the shekel's depreciation, especially if it continues to fuel inflation. "At the moment," he emphasizes, "there are no factors indicating any slowdown in the shekel's devaluation."

In this volatile market, Menachem acknowledges that sharp fluctuations are becoming the norm, with the market capable of moving in any direction by more than 1%. He predicts that the shekel may even reach NIS 3.90, given the current negative momentum. Ultimately, Menachem concludes that the market is approaching a level where the Bank of Israel may need to take action, although the exact timing remains uncertain.

This article originally appeared here and is reposted with permission.