In the last eighteen months, the exchange rate between the Israeli Shekel (ILS) and the United States Dollar (USD) has been on a rollercoaster ride, with fluctuations impacting various sectors of the Israeli economy. However, the outbreak of war with Hamas has intensified this trend, causing the USD to gain further strength against the shekel, with the exchange rate breaching the significant threshold of 4 Shekels per USD in just ten days.

Strengthened USD: Exporters and High-Tech Employees Benefit, While Importers Loose Out

For the last year, the USD had been steadily strengthening against the shekel, creating what was termed the “new normal” in the capital market. While this new trend might be beneficial to exporters and Israeli employees earning wages in dollars, the depreciation of the shekel can have inflationary effects, impacting the cost of living and purchasing power.

Importers and consumers are among those feeling the pinch. Importers have to contend with higher-priced goods in USD, which can lead to increased costs for consumers. However, the direct impact on consumers is expected to be relatively limited at this stage, with the most significant effect being on fuel prices and travel expenses, though the latter is currently subdued due to lower demand.

Decreased Consumer Spending

The Bank of Israel data reveals a 29% drop in credit card spending between October 8-14, 2023, with substantial reductions in the clothing and footwear industry (75% decrease) and the furniture and houseware stores (69% decrease), reflecting the impact of the Shekel-USD exchange rate on consumer behavior.

Savings and Investments

The exchange rate’s depreciation directly affects savings and investments. The public can benefit from the stronger dollar through pension savings, especially those with a foreign focus. For example, routes tracking the S&P500 index have reaped rewards from the robust dollar. Even with a partial foreign exposure of about 55% in their portfolio are gaining from the dollar’s rise. The strengthening dollar can moderate declines during market downturns.

After significant stock market declines following the war, the USD’s trend is expected to cushion investment portfolios yields, potentially offsetting losses in Tel Aviv’s stock market.

Dollar Funds Shine

Dollar funds have had a standout performance, benefiting from the stronger USD and the US Federal Reserve’s higher interest rate (5.5%) compared to the Bank of Israel’s rate (4.75%). Dollar funds have provided returns of around 15%, significantly outperforming Shekel funds (about 5%), partially driven by increased yields in Israeli government bonds.

Shekel Routes Experience Negative Yields

On the flip side, shekel provident funds and pension tracks, investing in shekel denominated fixed income securities (i.e. government securities, shekel bonds) have experienced negative returns due to the shekel’s devaluation, offsetting the Bank of Israel’s interest rate increase.

Future Considerations

Institutional bodies face important decisions in light of the USD’s sharp ascent. It remains uncertain whether they will increase their exposure to foreign currencies and the USD, given the potential for short-term instability. The assumption is that post-war, the shekel may strengthen, and this, coupled with possible legal reforms, could drive the currency’s value upwards.

In conclusion, the Shekel-USD exchange rate is influenced by a complex interplay of factors, including geopolitical events, market dynamics, and monetary policies. As we navigate this period of uncertainty, the implications of the exchange rate on various sectors of the Israeli economy will continue to evolve, and both individuals and institutions will need to adapt to these changes.