How strong is the shekel?
Israel Central Bank Deputy Governor underplays shekel's strength vs dollar

Israel’s shekel has been on the rise against the US dollar and reached its peak in nearly 10 years.

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The Shekel
The Shekel

Israel's shekel has recently strengthened against the US dollar and reached its peak in nearly 10 years. This might seem troublesome to some, but Andrew Abir, Deputy Governor of the Bank of Israel, says there's no reason to panic as these gains have largely been offset by the euro's rise over the same time period. So what's the story with the shekel and why the recent spike? Here's some info that might shed some light on the issue at hand.

What's going on?

Near the end of August, the shekel started gaining on the US dollar, reaching a near 10-year peak at the start of September. Abir cited a global “dollar move” as the reason for the shekel's strength. In a way this is true, seeing as how compared to other major currencies, the dollar has fallen off worldwide over the past few months. Another plausible reason for the shekel's gains is the fact that Israelis usually going overseas for the summer were forced to stay home due to COVID-19 travel restrictions. Israelis spend an average of $ 3 billion abroad over the summer months, which includes trading for dollars and other foreign currencies, which impacts Israel's balance payments totals since the money people spend abroad is seen as imports.

On the flipside, the virus has greatly undermined Israel's economy - and currency value in particular - with concerns of an even greater blow to the private business sector.

What has the shekel-to-dollar relationship been up to now?

None of this should come as a surprise. The shekel vs dollar exchange rates have seen some drastick changes over the past decade. The dollar has remained relatively strong over this period of time, with the shekel's best years coming in 2011, 2014, and 2018. In mid-2011, the Israeli currency hit its all-time peak at NIS 3.36 to $ 1. On September 1st of this year it was still at a close NIS 3.35 to a dollar, but saw a drop-off soon after.

The current state of the dollar can be explained by a multitude of factors, the most prominent of which are the political uncertainty in the US in the run-up to the presidential elections on Nov. 4th, and the handling of the COVID-19 pandemic. Interest rates dropping to near zero have not helped either.

How does this affect trade?

Abir's downplaying the shekel's gain against the dollar might seem odd seeing as the United States is Israel's single biggest export destination. However, as he said, the real problem might lie in focusing only on the dollar and ignoring how other global currencies are stacking up to the shekel.

In fact, reports that it is actually the European Union that is Israel's largest overall trading partner and compared to the euro, the shekel has seen a downward pattern in recent months. In September, the rate was around 4 shekels per euro while by mid-February this fell to around 3.7. All this was prior to the coronavirus making its impact felt worldwide.

Naturally, the international exchange of goods (imports / exports) plays a role in the currency exchange market since fluctuations in the rates of imports and exports dictate foreign exchange trends. The currency trading business, therefore, requires an understanding and analysis not only of the market but also political and other factors that can affect trade. The current state of the world economy is a great example of how the value of each currency and its trend can change quickly.

But it is this lack of ability to predict the future of the markets forms the very risk without which investments could not be lucrative. Conversely, states that in forex trading, you can still make a profit even if you are only partially right. Foreign exchange brokers, many of whom are reviewed on similar websites, do a lot of the analytical heavy lifting, ensuring that investment decisions aren't made in the dark.

On the other hand, market fluctuation and the overall state of the national and international economy will dictate the rate of growth and the number of differences in and between currencies, regardless of the amount of research done, even by professional analysts.

This is why the Bank of Israel has been intermittently acquiring a massive amount of dollars since March 2008. However, not even that has helped with keeping the shekel in check. The central bank bought $ 14 billion in forex this year, thus bringing the total foreign exchange reserves to nearly 162 billion US dollars. These are kept in many different currencies which are translated to dollars at spot exchange rates.

Seeing as how Israel's economy has strong foundations, thanks to natural gas production and a strong high-tech industry, the country has a surplus which will not disappear overnight. What is more, it's expected that this will boost the shekel even more in the future. While the shekel's strength is good for Israeli consumers, it's negatively affecting exporters which is the reason for the Bank of Israel making efforts to balance out the market.

How all of this will continue to develop remains to be seen.