Shekel Declines Below 3 NIS to the Dollar Amid Economic Concerns
On Wednesday, the shekel dipped below the 3 NIS mark against the dollar, reaching its strongest position in over three decades. This shift is largely tied to growing hopes for a resolution to the conflict with Iran and a potential cease-fire in Lebanon. However, manufacturers and exporters are expressing concern that the robust currency could pose challenges for the economy.
During trading on Wednesday, the dollar was valued at 2.993 shekels, reflecting the highest rate since October 1995. The shekel has gained more than 5% against the dollar this year alone and over 20% in the past year, even amidst escalating military costs and operations with Iran.
Abraham Novogrocki, the president of the Israel Manufacturers Association, cautioned that maintaining a dollar exchange rate below 3 NIS could severely undermine export profitability. He noted that fluctuations in the exchange rate of about 20% could completely eliminate profit margins, pushing manufacturers to the edge of closure.
The strong shekel, while helpful in making imports cheaper and easing consumer credit costs, could hurt the competitiveness of Israeli manufacturers. Particularly affected are those reliant on exports who earn in dollars but face expenses in shekels.
Mr. Novogrocki observed that industries are dealing with falling dollar revenues while expenses in shekels are on the rise, raising alarms about reduced business activity, investments, and potential job losses.
He also pointed out that many high-tech and multinational companies are contemplating moving their operations abroad, a shift that could negatively impact state revenues and create significant tax challenges.
“If we don’t take action soon, the entire economy might suffer,” he remarked.
It’s noteworthy that exports make up about 40% of Israel’s economic output. Data from the Central Bureau of Statistics indicated a 7.4% decrease in merchandise exports in shekel terms over the past year.
So far, the Bank of Israel has been hesitant to intervene by purchasing foreign currency or adjusting interest rates to curb the shekel’s rise.
Jonathan Katz, chief economist at Leader Capital Markets, mentioned that while a stronger shekel enables consumers to access cheaper imports and travel abroad, it’s the exporters who predominantly feel the adverse effects. This decline in competitiveness could eventually impact the overall export performance.
However, he emphasized that this situation doesn’t appear to be a bubble; the economy is resilient, with no immediate inflation threat, making intervention by the Bank of Israel unlikely.
The central bank has previously suggested it might act in the currency market during unpredictable fluctuations that clash with existing economic realities or in cases of market instability.
Ronen Menachem, chief market economist at Mizrahi Tefahot Bank, affirmed that local market dynamics and economic fundamentals are driving a strong demand for shekels.
He noted that there is optimism regarding a decrease in geopolitical risks, fueled by hopeful prospects for ending regional conflicts and agreements with neighboring nations, such as Saudi Arabia. Such developments could significantly enhance Israel’s economic growth potential.
The potential scenario could lead to increased foreign investments in both the domestic stock market and the high-tech sector, alongside a rise in defense exports—all contributing to stronger demand for the shekel.
