Shekel Shows Resilience Against Strong Global Dollar as Markets Weigh Rate Cuts

The US dollar ticked up slightly against the shekel to 3.082 shekels, with the representative rate at 3.078 shekels. The euro remained stable at 3.44 shekels, with its representative rate at 3.442 shekels. Earlier this morning, it was reported that the International Monetary Fund (IMF) upgraded Israel's growth forecast for this year to 4.5%. Ran Siny, chief economist at Ultra Finance, discussed the overall trend of the dollar-shekel exchange rate and the dollar against major global currencies: "Despite the strengthening of the dollar worldwide and expectations for a rate cut in Israel, the shekel continues to demonstrate strength. Institutional hedging flows provide part of the explanation, but two upcoming events may change the picture." The Tel Aviv trading week opened against the backdrop of an unusual trend in the foreign exchange market: precisely as the dollar strengthens globally, the shekel is recording sharp gains against the US currency.

"The shekel's strength is particularly notable in light of developments in global markets. The global dollar is at its highest level in about a year and a half against a basket of currencies, following four consecutive weeks of strengthening. Recent Fed minutes reinforced assessments that US interest rates will remain high for a long time, while yields on 10-year US Treasury bonds climbed to around 5.24%, after previously reaching approximately 5.35%."

These yield levels make US bonds particularly attractive for investors seeking a relatively solid alternative to the stock market. In such an environment, the natural tendency is to increase exposure to dollar-denominated assets, which typically supports the strengthening of the dollar against other currencies. However, additional forces are at play in israel, creating a different picture for now.

Interest Rates and Hedging Activity

Israel's interest rate currently stands at 3.25%, while annual inflation has totaled just 1.5%, below the midpoint of the Bank of Israel's inflation target range. These data points reinforce expectations for a possible rate cut at the upcoming decision on October 21. Generally, a interest rate cut is expected to reduce the attractiveness of the local currency, but in practice, the shekel continues to strengthen.

"One of the primary explanations lies in the hedging activity of Israeli institutional entities. These entities hold significant investment portfolios in overseas stock markets while simultaneously managing their exposure to foreign currencies. When the value of overseas investments rises, they may be required to sell dollars to maintain desired hedging ratios. These sales generate demand for shekels and support the strengthening of the local currency, even when global economic conditions point in the opposite direction."

Short-Term Outlook

Looking ahead, two events are expected to dictate the direction of trading in the short term: the publication of the Consumer Price Index (CPI) for September and the Bank of Israel's interest rate decision on October 21. According to our estimates, if the price index surprises to the downside and the Bank of Israel decides to cut the interest rate, the dollar could strengthen to the range of 3.08-3.12 shekels, while the euro could move within the range of 3.45-3.50 shekels.

"Conversely, if the Bank of Israel chooses to leave the interest rate unchanged, while dollar sales continue as part of institutional hedging activities, the shekel may maintain its strength. In this scenario, we estimate that the dollar will trade in the range of 3.02-3.06 shekels, and the euro in the range of 3.40-3.44 shekels."