The American dollar has dropped against the shekel by about
six percent from its highs of last month. The official middle
bank rate (sha'ar yatzig) is now about NIS 4.65 per
dollar, about where Bank of Israel economists said they
wanted it to be.
The big question is: what will happen now?
As of now, there is little risk that the shekel will fall
much, and it is unlikely even to approach the lows of almost
five shekels to the dollar that were seen only a month ago.
On the other hand, surprisingly to many, there is a
significant chance that the shekel will actually rise further
against the dollar.
This is partly due to the strength of the shekel but even
more due to the weakness of the dollar. Even though the
Israeli economy is down as a result of Palestinian violence
and the global economic malaise, it does not seem all that
bad when compared with everywhere else. The latest moves to
raise shekel interest rates and cut the budget provide a
strong insurance that nothing drastic will happen. In these
times, that is a source of strength.
On the American side of the dollar-shekel relationship,
things are not as sanguine. Over the past six months the
dollar has fallen significantly on world markets. For the
first time since it came into being two-and-a-half years ago,
the euro is worth more than the dollar, as the euro rose more
than 15 percent in the last six months. The reason is
certainly not the strength of the European economies that use
the euro, but rather the weakness of America and its
dollar.
The experts expect that the dollar will fall further, though
they are not sure how much. The universal hope is that it
will be an orderly decline like it has been so far, and not a
sudden drop that would be very disruptive.
There are many reasons for this expectation about the future
of the dollar. The American balance of payments has long been
heavily unfavorable to America (by almost $400 billion a
year), but it was always offset by money coming in to the
American stock market. Now the broad market has fallen
considerably. According to the Wilshire Total Market Index,
which tries to measure every stock that is publicly traded in
the U.S., the total value of all stocks fell from $17.25
trillion on March 24, 2000 (the peak) to $10.03 trillion on
Tisha B'Av. This is a decline of more than $7 trillion,
representing 42 percent of the total value at the peak. This
has made investing in America much less attractive than it
was.
Moreover, despite America's military strength, it has become
morally weaker because of a series of financial scandals that
have involved its most prestigious companies. There also may
be more to come. So far, the political response to these
problems has not reassured investors.
The result is that the prediction that the dollar will fall
against world currencies is very believable. The question is
if the shekel will fall with it, or not. Last week a
prestigious American investment bank, Goldman, Sachs and
Company, issued a report in which it maintained that the
shekel is undervalued by 25 percent and they expect it to
rise to about NIS 3.6 to the dollar!
We do not endorse this prediction, we certainly cannot say
what to do about it if one is convinced. But we feel it part
of our duty to inform our readers, to bring these insights to
their attention.
