The shekel is strengthening sharply against the dollar and against the euro in afternoon inter-bank trading today. The shekel-dollar rate is down 0.75% against the dollar at NIS 3.134/$ and down 1.59% against the euro at NIS 33.627/€, Trend reports with reference to Globes.
On Friday, the Bank of Israel set the representative shekel-dollar rate down 0.848% on Friday, at NIS 3.158/$, and the representative shekel-euro rate was set 0.244% lower at NIS 3.686/€.
Amid volatile foreign exchange trading today, the shekel is at its strongest against the dollar since January and its strongest against the euro in more than 20 years. The shekel has hit a new peak against the Bank of Israel's nominal effective rate, which measures the shekel against the basket of currencies of Israel's major trading partners.
A forex trader told "Globes," "Aggressive pricing around the rise in interest rates has brought about the strengthening of the shekel. The Bank of Israel has probably not realized this and this is what is happening. The strengthening of the dollar against the euro worldwide is not the story here. The stock exchange is high and so institutional investors are selling dollars. And the aggressive interest rate pricing here in Israel is also bringing about dollar sales for the shekel."
The forex trader added, "Until the Bank of Israel fends off this interest rate pricing with major resolve. The dollar will not revive and the shekel-dollar rate might go below NIS 3.10/$ within a week or two. In such a situation the Bank of Israel will get the worst of all worlds - both damage to growth through a currency that is too strong and damage to growth through interest rate pricing that is too high. Instead of choosing one of them it is getting both of them."
Israel's interest rate remains at a historic low of 0.1% and the Bank of Israel expects it to be between 0.1% and 0.25% in a year. But the local bonds market contains a rise in interest rate expectations above that of the Bank of Israel. This contributes to the strengthening of the shekel, with interest rate gaps causing the movement of capital from foreign financial investors into Israel. In most of the countries that raised interest rates this year, or raised interest rate expectations this year, the currency substantially strengthened."