The Israeli shekel rose to its highest level in a year Monday morning against the sinking American dollar, under severe pressure as U.S. President Barack Obama continues to pile up the U.S. debt. The shekel-dollar rate now is trading at the 3.74, its lowest level in a year.
Expectations are that today’s rate may be high compared to what is ahead. Merrill Lynch predicts that by next year, the rate will drop to 3.40, which would make the shekel worth 29.5 cents, compared with 26.5 cents today.
Two years ago, the shekel-dollar rate dropped to a 12-year low of 3.24 before rising to as high as 4.25 in April of this year. Since then, it has been in a tailspin.
American immigrants who converted their dollars after landing in Israel are benefiting from their confidence in the Israeli economy, which has proven to be one of the most resilient to the worldwide financial crisis spawned by extended credit in the American banking system. Dozens of U.S. banks have gone bankrupt while tighter regulations in Israel have averted a crisis.
However, the strong dollar poses a problem for exporters, whose income in dollars drops when converted at a lower rate in shekels. Bank of Israel Governor Stanley Fischer tried to overcome the problem more than a year ago with a massive purchase of dollars, going against his own stated philosophy that central bank intervention in local exchange rates usually boomerangs.
He was able to prop up the rate to around the level of four shekels, but the massive debt that President Obama is amassing, while bailing out failing companies and printing more money to pump up the economy, has left the dollar in the skids. The Bank admitted this week in its report on inflation, "The probability of a sharp rise in the exchange rate, which in the past was a risk factor that supported inflation, is low at this stage.”
It added that the massive amount of money in Israel’s foreign reserves account “is expected to create pressures for an effective appreciation in the shekel exchange rate."
Israel companies easily can limit damage to their profits by buying options on the shekel-dollar rate, which is in effect paying term insurance that protects against a drop in the rate. Nevertheless, Finance Minister Yuval Steinitz met with Manufacturers Association president Shraga Brosh on Friday to discuss ways to protect exports.