As of Tuesday morning, the dollar is worth NIS 3.107 which is great news to Israelis planning a trip abroad or purchasing high- and low-ticket merchandise online, but is terrible news for American pensioners living in Israel who rely on their Social Security checks from Uncle Sam, for Olim planning a new life in the Holy Land who sold their home in the US and are looking to buy the things one must have: a new home, new refrigerator, new car, you know the drill. This is also terrible news for Israeli manufacturing and the tourism industry, which can’t compete on the world market.
Under Prime Minister Benjamin Netanyahu, the Bank of Israel has purchased almost $30 billion since the beginning of 2021 to moderate the strengthening of the shekel. But the Israeli coin soared by 4% despite that intervention. Now that the bank no longer buys US dollars, we’ve seen the Shekel rising at a frightening rate, and there’s no sign at this point that the dollar won’t dip below the all-time level of 3 Shekel.
Alex Zabezhinsky, the chief economist with Meitav Dash Investments, wrote on Sunday that “the domestic bond market, like many other markets around the world, began last week to change its opinion on the forecast interest rates in Israel against the background of a continued rise in inflation expectations, which have reached one of the highest levels since the financial crisis of 2008. In addition, the IRS’s two-year interest rate on debt (accrued on the unpaid tax from the due date of the return until the date of payment in full) also rose last week to above 0.5%. The interest rate for another year in over-the-counter (OTC) derivatives reached about 0.8% and embodies about two interest rate increases during the year. The increase in interest rate expectations is probably also the main reason for the sharp strengthening of the shekel last week, whose exchange rate against the basket of currencies reached a peak.”
Let’s face it, Israel’s economy is as robust as they come. Not a week goes by without a report of another exit of a high-tech Israeli company to the tune of tens if not hundreds of millions of dollars. Capital movements to Israel as a result of acquisitions, mainly in the high-tech industry, lead to an increase in demand for shekels since the dollars entering the country need to be converted into shekels. Last year, the volume of direct investment in the Israeli economy reached $24 billion. The first half of this year has already seen about $14 billion. If this trend continues—and there’s no reason it won’t—the volume of capital entering the local will exceed last year’s. It could reach $28 billion, maybe more.
One key reason the Bank of Israel is not buying any more dollars has to do with its seeking to raise the inflation—temporarily. As a result, imports will be much cheaper, including essential products such as food and clothing. Israeli consumers will enjoy cheap goods and the Finance Ministry will continue to rake in the taxes. Everybody wins – except, of course, farmers and industrialists, some of whom are already facing extinction as a result of the pandemic.
Now, those Israeli high-tech companies are facing a huge dilemma—rich people’s problems but still problems—as Rami Tamir, co-founder and CEO of Salto Systems that serves retail businesses: how many US dollars to convert into Shekels? At the current rate, if they dump a serious amount, they’d be taking a painful hit. On the other hand, if they don’t spend their dollars, they would suffer operational problems until the currency market turns around – if it ever does.
Tamir told Walla on Monday that his strategy these days is to convert just enough to cover his expenses for the next year or two and sit on the rest. Others have confessed that they prefer to ride on the daily trends and convert USD to NIS the minute the latter drops a couple of points.
Except it hasn’t done that in some time.