Last year was certainly not dull in terms of the diversity of events that occurred. For starters, global bonds and stocks have had a historically poor year, with record value losses and the worst return decreases in almost a decade. For the first time since World War II, Europe faced a major war conflict, the ensuing energy crisis, and last but not least, a rate of inflation in the Western world not seen in decades.

In fact, it was because of the rampant inflation that the Federal Reserve raised interest rates in its attempt to bring it under control. As a consequence, the dollar rose in value compared to all major currencies, including the shekel. At the beginning of the year, the USD/NIS exchange rate stood at NIS3.11/$. However, with the Fed’s policy taking a turn, the shekel started losing ground, reaching highs of NIS3.58/$. The dollar also gained 11% against the pound and 6% against the euro.

However, the trend has shifted in recent months. According to Bloomberg, the dollar index (DXY) suffered its worst quarter in twelve years against the world’s currencies, falling 8% from its peak in September 2022. What’s interesting is that the dollar appreciated against the shekel.

According to Israeli analysts, a strong dollar is a temporary phenomenon, and this is unlikely to continue in the near term. One of the reasons is that, due to the Fed’s stance, there is now anticipation that interest rate hikes will slow down and won’t be moving much higher.

However, other experts are more cautious and see the possibility of the dollar holding its elevated status for a period of time. One of the reasons is that Europe is on the brink of a recession.

In an interview with Globes, Kobbi Levi, head of markets strategy at Bank Leumi, stated, “What affects the shekel in the short term is mainly the global stock markets, which have fallen over the past few weeks, mainly following interest rate decisions and expectations that the monetary environment will remain tight for a longer time.”

Levi sees the shekel’s depreciation happening when Israeli institutional investors, most of whose investments are already made abroad in dollars, hedge their holdings so that when there is a market sell-off, they purchase USD to retain their value.

During the last four weeks, however, the shekel lost 4% of its value against the greenback.

Despite this recent weakness, investment firms in Israel think that the shekel will appreciate against the dollar, with consensus being at NIS 3.40-3.45/$.

According to Kobbi Levi, the fundamental drivers of a current account surplus and money flowing into Israel are projected to persist and support the shekel’s gain in 2023. On the other hand, further declines in the stock market, which were the main force weighing on the shekel in 2022, are anticipated to continue for the time being. And this is where the Bank of Israel comes into play, which can manage the market with a wide range of tools at its disposal to lower or boost the shekel rate.

However, volatility in global stock markets and the possibility of a recession in the first half of this year would certainly bolster the USD, since it is still viewed as a safe haven in times of uncertainty.