The dollar continued its fall against the shekel early
Monday, falling to NIS 4.47 in interbank trading. Altogether,
in the past two months the shekel has appreciated 9.2 percent
against the dollar. These rapid fluctuations are often a
symptom of an economy in transition. Some observers say that
it may fall as low as NIS 4.4.
The shekel appreciation, although it lowers the Israeli
inflation rate, may hurt growth since a strong shekel makes
Israeli goods relatively higher priced compared to foreign
goods. Israeli exporters must cut prices to stay competitive,
lowering profit margins. Exporters are a major engine of
growth in Israel.
The higher shekel makes Israel relatively less attractive to
tourists. With the end of the Iraq war and the lessening of
Palestinian terror, some Israeli businesses are hoping for
modest increases in tourism.
Exports, especially high-tech, began improving in the first
quarter of 2003, at least in part due to the shekel
depreciation in 2002, even though the Iraq War had a
generally depressing effect on business throughout the
The shekel appreciated 0.77 percent against the dollar to NIS
4.486 on Friday, the lowest rate since December 2001. The
shekel has appreciated 5 percent against the dollar since
April 1, after appreciating 4.2 percent in March.
The sharp appreciation suggests that the economy may be
reverting to the major exchange rate fluctuations that have
hurt the country's banking and financial systems in the past.
Similar fluctuations were experienced during the 1983 bank
share crisis and 1993 financial bubble. The volatility
increases uncertainty and makes it difficult to plan
Some economists said the shekel appreciation was the result
of irrational herd behavior, which was projected from the
foreign currency market onto the stock market. Since the
foreign currency market is small with few players, a very
small number of buyers or sellers can distort the exchange
Many economists were surprised by the moves, saying that
"economic reasons" were insufficient to justify the shekel's
The interest rate was cut by 0.3 percent last week to 8.4
percent, a month after rates were cut by 0.2 percent. The
lowering of the interest rate should weaken the shekel.
However, the Israeli interest rate remains much higher than
rates around the world, even after the two cuts. This tends
to raise the value of the shekel. The dollar has also
weakened seriously in world markets. It fell sharply against
the euro to over $1.20 per euro.
The sharp appreciation in the dollar against the shekel has
also caused Israel's inflation rate to drop from 7 percent to
1 percent per year. Much of last year's high inflation was
due to the rise in the value of the dollar. This would also
strengthen the shekel.
Observers also note that Israel's economic and psychological
climate has improved following the approval of the US loan
guarantees, the first Knesset vote on the economic plan,
signs of diplomatic talks with Syria, and indications that
the US will enforce an Israeli-Palestinian settlement. The
removal of the threat from Iraq also means that there is now
no visible military threat to Israel from the east.
Some economists worry that if the shekel appreciates too
much, it will overcorrect later, undermining stability and
requiring corrective measures, including raising the interest
rate. The Bank of Israel may slow its pace of interest rate
cuts in order to avoid repeating the mistakes of 1993.
The Israeli stock exchange in Tel Aviv (TASE) rose sharply on
Sunday. The main index passed 400 points, after falling to
the low 300s.