The foreign exchange market in Israel witnessed heightened volatility as the shekel depreciated sharply against the dollar, nearing a five-month high at NIS 3.80. This significant movement reflects ongoing concerns surrounding Israel’s geopolitical situation, particularly its stance against Iran and escalating tensions in the northern region. Moreover, this tumultuous environment has reverberated into declines in the domestic stock market, amplifying investor apprehensions.

According to Ronan Menachem, Chief Economist at Mizrahi Tefahot Bank, the recent turmoil in the foreign exchange market follows a period of instability triggered by rumours of potential escalation between Israel and Iran. He emphasizes the market’s heightened sensitivity to geopolitical events, resulting in increased intraday volatility.

Kobi Levy, head of the market strategies desk at Bank Leumi, provides additional insights, noting that despite relative stability earlier in the day, the shekel weakened significantly in the final hours of trading due to low liquidity and heightened demand for dollars from foreign investors. Levy also highlights the widening credit spread of Israeli bonds amidst geopolitical tensions, indicating underlying market concerns.

While the shekel struggles against the dollar, the greenback has been gaining strength against other major currencies, as evidenced by the DXY index reaching record levels since November. The latest dollar strength could be also attributed to statements from Federal Reserve Chairman Jerome Powell and robust data on private consumption in the US, delaying anticipated interest rate cuts.

Looking ahead, however, there is a potential possibility that Israel’s defence industry prowess may bolster the shekel in the long term once negative sentiments subside. Having said that, attention remains on the Bank of Israel, which has refrained from intervening in the foreign exchange market since the onset of geopolitical tensions. While intervention has not been ruled out entirely, at this point, the shekel’s devaluation can be attributed to the fact that the central bank may refrain from immediate action. Nevertheless, the Bank of Israel continues to monitor market developments closely, prepared to intervene if necessary to maintain stability.