In foreign currency trading, the dollar is trading at NIS 3.097, after falling to a new low during the day Tuesday and trading at NIS 3.088. This is very good news for Israelis who import goods or go on trips abroad – although with Europe going red with the Corona pandemic it’ll be a while before the next vacation. It’s very bad news for Israel’s two most thriving sectors: Hi-Tech and Industry, which find it harder to compete in foreign markets. It’s also bad for Israelis whose source of income is in the US, most notably American olim living on their Social Security checks and their pensions. These folks have seen their income slashed by 25% over the past few years.
Meanwhile, the Central Bureau of Statistics (CBS) reported on Monday that Israel’s gross domestic product (GDP) rose in the third quarter by 2.4% on an annualized basis. This increase in GDP was lower than earlier expectations. The segmentation of the data shows that exports rose in the third quarter by 7.5% and imports by a more moderate rate – 2.7%. This could mean that the strong shekel is starting to weigh down on the local economy.
The average exchange rate of the US dollar in Israel in 2020 was NIS 3.4424, 35 agorot higher than today. To prevent the dollar from falling to such low rates, the Bank of Israel intervened in January and purchased about $3 billion in ten days. However, the decline in the price of the shekel was halted for only a few hours and resumed on the next trading day.
Some economists claim that the Bank of Israel’s method of intervention in trade is outdated and no longer makes sense. There’s no need for the Bank of Israel to own currency balances of about $170 billion when the repeated purchases of dollars in the foreign exchange market do not achieve the desired goal, which is stopping the decline in the dollar exchange rate to help exporters avoid losses and prevent the closure of production lines for exports in many local industries.
And so, since about mid-2021, the Bank of Israel has ceased its purchases of US dollars (incidentally, the euro and the British pound have also taken a beating from the shekel this fall). Instead, the Bank’s policy has shifted to calm excessive volatility and otherwise just let the economy do its thing.
Israel’s economic success, especially in Hi-Tech, is the biggest contributor to the rising of the shekel. There has been a flood of exits of Israeli high-tech companies, which is bringing dollars to Israel, and with wage increases for high-tech workers, a significant stream of dollars hits the local market when those salaries are paid each month. This phenomenon has reached a critical stage with the rises on Wall Street that cause institutional investors to go over their own set maximum exposure to the dollar so they convert their shekels when there’s a direct correlation between the increases on Wall Street, especially on the Nasdaq and the S&P 500, increasing the pressure on dollar sales in Israel.
Of course, new worrisome signs notwithstanding, Israel’s macroeconomic situation is fantastic compared to the rest of the world. In recent days, macro data on the local economy have shown that the country’s overall growth is reasonable: the decline in unemployment continues and inflation has not erupted in alarming proportions. This makes international investors eager to invest their money in Israel.
Also – You can love or hate the Lapid-Bennett-Liberman government on ideological grounds, but the state budget it just passed is as close to a dream budget as could be imagined, with a long list of reforms that will make the Israeli economy even more attractive in the coming years. This further encourages investors to take a position in the Israeli economy.
It remains to be seen whether the Israeli economy can take all this loving.