Shekel continues to decline, hits two-year low against the euro

Currency currently trading at 3.68 to the dollar and 4.02 to the euro, ahead of Moody’s country credit rating update on Friday

The new 100 Israeli Shekel bill, December 31, 2017. (Nati Shohat/Flash90)
The new 100 Israeli Shekel bill, December 31, 2017. (Nati Shohat/Flash90)

Israel’s shekel has continued to weaken in recent days, currently trading Wednesday at 3.68 to the US dollar and 4.02 to the euro — the latter being a high of some two years.

The national currency has been on a downward trend for several months, amid the government’s efforts to radically overhaul the country’s judiciary, and as Israel reels from a string of terror attacks and rocket barrages from beyond its borders.

The latest data comes as the Moody’s rating agency is set to publish its updated credit score for the country on Friday.

In March, Moody’s warned that the government’s plans to curb the judiciary could weaken the country’s institutional strength and negatively affect its economic outlook. Israel’s current rating is A1, the agency’s fifth highest, with a positive outlook, but investors are concerned it could downgrade the outlook to “stable.”

Earlier this month, the Bank of Israel lifted the benchmark interest rate for the ninth straight meeting, raising its key lending rate by 25 basis points to 4.5 percent, the highest level since before the 2008 crash, as the central bank battles inflation pressure and as “tremendous” uncertainty over the government’s judicial overhaul plan weighs on the economy.

“The uncertainty and the events we witnessed in recent weeks have naturally also had an impact on the Israeli economy,” said Bank of Israel governor Amir Yaron.

Specifically, Yaron warned about the “uncertainty deriving from the legislative processes related to the judicial system” and the substantial impact these could have on the “economic and financial developments in the short term and in the longer term, and therefore on the monetary policy that will be required.”

As negotiations between the government and opposition aimed at compromising on the coalition’s contentious judicial overhaul legislation continue under the auspices of President Isaac Herzog, Yaron raised hopes “that to the extent a decision will be reached that reflects a broad agreement through dialogue and collaboration, the economy will also be better off for it.”

The Bank of Israel has steadily raised its benchmark interest rate from a record low of 0.1% last April in a bid to rein in inflation, which has been hovering above 5% in annual terms for the past six months, falling short of the government’s target range of 1% to 3%.

The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)

“Economic activity in Israel is at a high level, and is accompanied by a tight labor market, although there is some moderation in a number of indicators,” the central bank said in a statement. “There has been some moderation in annual inflation, but the moderation is slower than previous assessments.”

As for the judicial shakeup, the main concern is that it will erode democracy and weaken checks and balances, which in turn is feared to make venture capitalists and other money makers leery of investing their money in the country, triggering an outflow of funds.

The Bank of Israel noted that there are already developments in the markets indicating an increase in the economy’s risk premium.

“While prices increased on capital markets worldwide for the year to date, equity indices in Israel have underperformed them and have declined over the year to date,” said Yaron. “There was high volatility in the shekel in recent weeks, which was also impacted by the recent events in the country.”

“From the beginning of the year, there has been a marked depreciation of the shekel vis-à-vis the dollar and in terms of the nominal effective exchange rate, and even some separation from the strong connection that there was between the S&P 500 and the exchange rate,” he added.

In recent weeks, Yaron has cautioned against the potential economic danger posed by the government’s push to curb the justice system, warning about a slowdown to investments into the local tech industry and risks of a brain drain.

Sharon Wrobel contributed to this report.

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