In the face of ongoing conflicts in Gaza, the threats of additional military fronts, and economic challenges, the Israeli shekel has defied expectations by reaching a peak against the dollar and the euro. The shekel’s resilience has left analysts and experts puzzled, considering the various geopolitical and economic factors at play.

Global Market Influence

Yonatan Katz, Chief Strategist at Leader Capital Markets, attributes the shekel’s unexpected strength to surges in foreign stock markets. The American S&P index, for instance, recorded a remarkable 16% increase in the last two months, the highest in four decades. This surge prompted Israeli institutional entities to sell foreign currency in the local market, thereby strengthening the shekel.

Furthermore, Katz notes that the market’s perception that the conflict in Gaza would not escalate into a broader regional war has contributed to the shekel’s strength. Additionally, the Bank of Israel’s commitment to a restrictive monetary policy, in contrast to potential interest rate cuts in the US and Eurozone, has bolstered confidence in the shekel.

Ofer Klein, Head of the Economics and Research Department at the Harel Group, emphasizes the influence of the meteoric increases in the American stock market on the shekel’s strength. The exposure of institutional bodies to rising indices abroad results in a surplus of dollars, which are then converted into shekels.

The war in Gaza itself has created an unexpected surplus in the Israeli current account, leading to a dollar surplus and strengthening of the shekel. Additionally, the shekel’s rise coincides with a global weakening of the American currency.

Furthermore, the shekel’s upward trend aligns with similar movements in other major currencies. The Swiss franc, for instance, stands at a nine-year high against the dollar, while the Japanese yen is expected to register a nearly 5% increase against the dollar in December alone. The euro has also strengthened against the dollar, despite economic challenges in the Eurozone.

Finally, the decline of the judicial reform from the public focus had its impact as well. While Bank of Israel Governor Amir Yaron previously estimated a 10% devaluation due to the reform’s threat, the market’s belief that the legislation is off the table currently bolsters the shekel. However, some experts, remain cautious about attributing the shekel’s strength solely to this factor.

In summary, the immediate future for the shekel seems promising, driven by positive economic indicators. Yet, the sustainability of this upward trajectory is contingent upon proactive policymaking. The risk of over-optimism looms large, fuelled by potential challenges arising from post-war political uncertainties, legal reform concerns, budgetary breaches, and the imperative for government security investments. To secure the shekel’s resilience, policymakers must address these issues with a comprehensive economic plan, incorporating essential cuts in civilian spending to safeguard fiscal credibility and ensure long-term stability.