Israel Shekel’s Fall Persists Despite Central Bank’s $45 Billion Support

Despite the central bank’s intervention, the shekel experienced a decline, reaching its lowest level since 2016, down 2% against the dollar.

The shekel‘s decline comes after an attack by Hamas militants on Saturday.

In response to the surprise attack by Hamas militants on Saturday and the subsequent declaration of war by the Israeli government, Israel’s central bank, the Bank of Israel, has unveiled a significant intervention plan aimed at shoring up the country’s currency, the shekel.

The central bank’s statement on Monday outlined a comprehensive program that includes selling as much as $30 billion in foreign exchange and extending up to $15 billion through swap mechanisms. The primary objective of this intervention is to mitigate the volatility in the exchange rate of the shekel and ensure essential liquidity in the financial markets.

This move represents a dramatic shift in policy for the Bank of Israel, which had previously been concerned about the shekel’s excessive appreciation. It marks the first time the central bank has engaged in selling foreign exchange to support the shekel since it was allowed to float freely.

The decision comes on the heels of the deadliest attack on Israel in decades, which resulted in hundreds of casualties. Prime Minister Benjamin Netanyahu has indicated that the conflict with Hamas in the Gaza Strip is expected to be protracted and challenging.

Despite the central bank’s intervention, the shekel experienced a decline, reaching its lowest level since 2016, down 2% against the dollar.

In contrast, Israel’s benchmark TA-35 stock index initially dropped but later rebounded, rising by 0.2% after suffering a 6.5% plunge on the previous day. Stock markets in the broader Middle East region also faced losses amid concerns that the conflict could escalate further, with Dubai’s benchmark gauge dropping by 2.9%.

Geoffrey Yu, a currency and macro strategist at BNY Mellon in London, commented, “In circumstances like this, maintaining stability is more important than levels. In the short term, there will be some volatility in markets, but we expect this to be manageable. The liquidity support is expected, and the Bank of Israel is very much experienced in such matters.”

The shekel had been under pressure for months due to investor concerns surrounding the government’s controversial efforts to curtail the judiciary’s authority. Among a basket of 31 major currencies tracked by Bloomberg, the shekel ranks as one of the year’s worst performers.

As the conflict continues for a third day, Deutsche Bank AG suggests that Israel’s central bank is likely to increase interest rates further and could reintroduce bond purchases to provide support to the shekel and financial markets.

Deutsche Bank strategists led by Christian Wietoska noted that although geopolitical tensions had previously had minimal effects on the currency, this time, “pressure on the shekel seems unavoidable.”

The Bank of Israel’s currency interventions, over a decade ago, aimed at curbing the surging shekel, have led to substantial reserves, surpassing a third of the country’s GDP. As of August’s end, these reserves stood at nearly $203 billion.

This recent intervention is the first by the central bank in approximately two years. US President Joe Biden has pledged unwavering US support for Israel.

Paul McNamara, a fund manager at GAM UK, expects a minimal impact on rates and a gradual shekel movement, citing the scale of reserves and US support. The conflict has also rattled bond investors, with the price of Israel’s 100-year debt maturing in 2120 falling to its lowest level since its issuance in 2020. Additionally, the cost of insuring the nation’s debt against default surged to its highest level since 2009, with a 25-basis point increase to 84.