Shekel drops to 4 against USD for first time since 2015

USD/ILS drops to 4.00 in first since 2015 as Israel prepares for apparent ground assault on Gaza

The exchange rate of the New Israeli Shekel passed NIS 4 per U.S. dollar on Monday, marking the currency's weakest level since 2015, with Israel in its 10th day of war against Palestinian militant group Hamas.

Following the devastating attack launched by Hamas on October 7 in Israel's southern communities, in which over 1,300 were killed, more than 4,000 injured, and some 200 individuals being kidnapped to Gaza, the shekel has dropped by close to 4% against the U.S. dollar, as noted by The Times of Israel.

In recent days, there has been a growing sense of uncertainty among investors regarding the duration and extent of the conflict. This comes as the Israel Defense Forces (IDF) prepare for a ground operation to combat Hamas in the Gaza Strip.

The U.S. Dollar Index, meanwhile, steadied above 106 on Tuesday as investors looked to fresh interest rate-related commentary from the Federal Reserve.

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Shekel news: Bank of Israel intervenes to prop up USDILS

Last week, the Bank of Israel announced that it planned to sell $30 billion in foreign exchange reserves to prevent further shekel depreciation and provide market liquidity. The central bank plans to use the funds to intervene in the market and “moderate volatility in the shekel exchange rate and provide the necessary liquidity for the continued proper functioning of the markets,” it said last Monday.

Prior to the Hamas attacks on October 7, the shekel was already facing pressure due to Prime Minister Netanyahu's actions against the country's judiciary system, despite earlier protests in the year.

The Bank of Israel has also introduced measures beyond its $30 billion forex sale program, which include offering dollar liquidity to the market through SWAP mechanisms of as much as $15 billion. SWAP mechanisms are a type of futures contract where two parties exchange cash flows or liabilities from two distinct financial instruments.

Last week, Bank of Israel governor Amir Yaron committed to stay in his position until the end of the current emergency to help steer the economy during the state of war.

Israel inflation rate: BoI may lower borrowing costs to ease burden during war

Israel's consumer price index (CPI), which measures the average cost of household goods, unexpectedly decelerated 0.1% in September, before the surprise attack by Hamas, according to data from the country’s statistics bureau cited in a report by The Times of Israel.

Given the lower-than-expected inflation data, economists and market participants have started factoring in the possibility of an interest rate cut by the Bank of Israel — potentially at its next monetary policy meeting on October 23, or even earlier if deemed necessary.

“The September CPI index points to the fact that the economy was slowing even before the war broke out,” said Israel Discount Bank chief economist Nira Shamir. “This strengthens our assessment that the Bank of Israel will lower interest rates by 50 basis points at the upcoming decision in the current situation of a sharp slowdown in growth in general and private consumption in particular.”

Israel’s central bank had been gradually increasing its benchmark interest rate from a record low of 0.1% in April 2022 to 4.75% this year in an effort to combat inflation.

With the ongoing conflict with Hamas in Gaza expected to have a significant impact on the Israeli economy and growth prospects, as well as affecting households and businesses, there is an increased likelihood that the central bank will reduce borrowing costs to help alleviate the economic strain during the war.

Shekel forecast: Citi sees shekel underperforming, Goldman says further depreciation unlikely

Citigroup strategists Luis Costa and Bhumika Gupta said they saw further downside for the shekel in a note cited by Bloomberg on Monday:

“In Israel, we expect the shekel will likely continue to underperform due to the current uncertainty, even if the pace of potential depreciation is capped by the Bank of Israel.”

Strategists from Goldman Sachs, however, said the shekel is unlikely to depreciate further. They highlighted that Israel possesses substantial reserves to provide a buffer for the currency and added that the country’s balance of payments is in a "much healthier" condition compared to past episodes of conflict.

In past clashes in the region, there were also "significant financal inflows from abroad” — including aid and other financial transfers — which contributed to bolstering the strength of the shekel, said the Goldman Sachs analysts.

Bank Hapoalim says BoI created “firewall” to protect Israel’s economy

The moves in dollar to shekel exchange rate were “characterized by very low volatility” around the 3.95 mark, suggesting that the central bank has been active selling dollars, according to Tel Aviv-based Bank Hapoalim. “The prevailing assessment in the market is that foreigners were involved in the sale of shekels,” the bank’s analysts said.

Options traders believe there is a mere 20% chance of the shekel depreciating beyond 4.1 against the dollar by the end of the year, a level that the central bank seemed committed to maintaining in 2012.

“The strong financial strength of the economy enabled the Bank of Israel to create a kind of firewall that succeeded in separating — in part — the negative impact on the real economy from the financial markets,” Bank Hapoalim said in a comment to Bloomberg.

The USD to ILS exchange rate stood at 4.0192 at the time of writing on Tuesday, up 0.12% on the day, as per MarketWatch data. The dollar to shekel rate has gone up by close to 14% year-to-date.

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