As the new year unfolds, the Israeli shekel is experiencing heightened volatility, with the dollar making significant gains against the local currency. At the start of the week, the exchange rate stood at NIS 3.6, but a sudden depreciation led to a spike, reaching NIS 3.65. Today, the shekel’s devaluation worsened, with the dollar surging over 1%, reaching around NIS 3.69. This marks a 2% strengthening of the American currency against the shekel in just one week.

Several factors contribute to this financial turbulence, with recent political developments taking center stage. A pivotal War Cabinet meeting erupted following a clash between right-wing ministers and the Chief of Staff, triggered by the appointment of an internal IDF inspection team to scrutinize the events that led to October 7 events. This internal discord has sparked criticism of the government’s handling of the ongoing conflict.

Economist Rafi Gozlan, Chief Economist at IBI, highlighted that domestic events played a significant role in influencing the foreign exchange market. The recent decision by the Bank of Israel to lower interest rates was expected by the market but still contributed to the shekel’s decline against the dollar. Interest rate differentials impact market attractiveness, and a decrease can make the country less appealing for investments compared to others.

The situation escalated further with events on the northern border, notably the assassination of senior Hamas official Saleh al-Arouri in Beirut. According to Gozlan, this event caused a ripple effect across markets, leading to a weakened shekel, a plummeting stock market, and an increased risk premium for Israel globally.

Ronan Menachem, Chief Economist at Mizrahi Tefahot Bank, highlighted the global impact of the conflict, emphasizing the ongoing influence of the Houthis on global foreign trade, which also affects Israel.

Furthermore, Gozlan noted that the close of 2023 saw the global weakening of the dollar. The end-of-year market dynamics, coupled with sparse trading following holidays, contributed to the dollar’s global depreciation. Now, the dollar is rebounding to its original strength, playing a part in its strengthening against the shekel in Israel.

Looking ahead, the security sector remains a significant concern for the markets. The ongoing discussions about the aftermath of the war, both geopolitically and politically, could introduce uncertainty that may impact the markets and the shekel in the future. Last but not least, recent High Court decisions, could further deteriorate financial situation, adding potential sources of tension.