Shekel reaches NIS 3.11 to the dollar as ‘avalanche’ continues

Israel’s manufacturers and exporters are suffering as the shekel reaches its strongest level in 25 years. However, analysts don’t see the trend changing anytime soon.

The shekel traded at NIS 3.11 to the dollar Tuesday, retreating slightly after touching below NIS 3.10 the day before. Against the euro, the Israeli currency traded at NIS 3.59.

The shekel has gained 4% so far this year, making it one of the top global currency performers of 2021. Since the beginning of the pandemic, the shekel has strengthened by about 10%.

Barring any sharp market corrections, the shekel will continue to strengthen further and could reach NIS 3.05 by the end of 2021 and NIS 2.95 by mid-2022, said Jonathan Katz, chief economist at Leader Capital Markets.

While industry leaders are calling for the Bank of Israel to do more to weaken the shekel, there is little likelihood it will make any significant moves, he said.

Bank of Israel Governor Amir Yaron has given clear messages that he sees little reason to intervene in the foreign-exchange market, which is a clear shift in policy from his predecessors.

The main tools in the central bank’s monetary-policy toolbox are buying more dollars and reducing interest rates. But with the benchmark lending rate still at a record-low 0.1% and the bank’s currency-market targets already exceeded, it is not clear how much more can be done.

The Bank of Israel has already bought more than the $30 billion worth of shekels it said it would buy in 2021. As the shekel touched NIS 3.08 during trading Monday, the central bank apparently made a surprise intervention and bought hundreds of millions of shekels to weaken the currency. However, additional purchases are not expected and would not likely have much of an effect slowing down the shekel’s growth in any case.

The shekel’s strength has been attributed to a combination of factors, including Israel’s rapid economic recovery from the pandemic; a large current-account surplus that is expected to reach 5.5% of GDP in 2021, due largely to hi-tech sector sales; and massive foreign direct investment in the hi-tech sector.

“There is sort of an avalanche effect happening now,” Katz said.

However, there is still plenty of good news, he said, adding:

“In general, while exporters will struggle, a strong shekel is good for the economy. Consumers gain from this, and investments will be cheaper as well. Companies thinking of expanding their activity purchasing new equipment will all pay less. It will also help soften inflationary pressures.”

Meanwhile, manufacturers are fuming, as their revenues drop while costs remain the same.

“What the coronavirus variants did not do to the economy, the dollar variant will do,” said Ron Tomer, president of the Manufacturers Association (MAI). “Exporters in all sectors of industry and also in hi-tech are starting to export without any profit or at a loss. This is an unsustainable process, and when it explodes, it will blow up in our faces.”

MAI vice president Ayelet Nahmias-Verbin said: “We are at a point we have never seen before. There is no manpower to work at companies, and when there is, it costs us three times more. There are no raw materials to work with, and when there are, they cost ten times as much due to rising shipping costs and the dollar erosion.

“The dollar is a significant part of the pressure the economy is experiencing. It is impossible to continue producing and exporting under these conditions. The exports that helped get the economy out of the crisis are facing collapse.”

Marian Cohen, chairman of the Association of Hi-Tech Companies in the Manufacturers Association, said: “For all hi-tech manufacturers, 60% to 100% of sales are done in foreign currency, while all costs are in shekels. It goes straight down to the bottom line.

“The dollar crisis is moving companies to develop branches abroad instead of in Israel. Company reports will remain at similar levels, but there will be no industry here. Already today, Israeli hi-tech employs about 70,000 workers abroad.”