Dollar Rises to 3.06 Shekels Ahead of Fed Decision

The dollar is climbing in the local market against a slight retreat in global markets ahead of the Fed's interest rate decision this evening, coinciding with a sharp rise in oil prices following the renewal of mutual attacks with Iran. The dollar is up 0.3% to 3.06 shekels, while the euro has risen 0.4% to 3.49 shekels.

In global markets, the dollar index against a basket of leading currencies is falling 0.1% to 101.3 points, the euro is up 0.1% to around 1.14 dollars, and the pound is rising 0.1% to around 1.33 dollars. Markets estimate that the US central bank will leave interest rates unchanged, but inflationary pressures stemming from the war with Iran and bottlenecks in the AI sector may lead Fed officials to surprise the market with a hike.

As of yesterday, the market assigned a 68.5% probability to leaving rates unchanged and a 31.5% chance for a reduction. In recent years, the Fed has tended to hint at its decisions in advance. However, Fed Chair Kevin Warsh has made it clear that he wants to return the central bank to an era of less predictable and transparent communication, similar to the tenure of former Chair Alan Greenspan. Warsh has repeatedly stated he wants a "good family argument" in rate-setting discussions, and it appears he will get one this week.

At the June Fed meeting, committee members were evenly split on whether to raise rates this year. Warsh himself has not revealed his position and could tip the scales in either direction. According to Michael Gapen, chief US economist at Morgan Stanley, this will be the central debate at the two-day meeting: "Has the central bank run out of patience?"

Gapen estimates the Fed will leave rates unchanged today, as "inflation has improved to an extent that allows buying more time." However, if the Fed decides to hike, it may be because Warsh has a "much more hawkish approach than we estimate." Gapen questioned whether Warsh would seek to establish his credibility as an inflation fighter by raising rates now to return to the 2% target faster. "We don't think that will happen, but we cannot rule it out," he wrote.

Richard de Chazal, a macro analyst at William Blair, noted that a rate hike would help Warsh prove he is "serious about fighting inflation." Fed officials still see scenarios where inflation decreases if the war with Iran calms down, tariff impacts remain moderate, and rental prices continue to soften. Conversely, they identify risks that the war will lead to a prolonged rise in oil prices, while massive AI investments continue to exert upward price pressure.

"Inflation is still too high and certainly not moving in the right direction," de Chazal wrote, adding that this gives Warsh an opportunity to send a clear message. He noted, however, that a hike might surprise markets and cause volatility. It is possible this is a price Warsh is willing to pay, especially if the Fed is inclined to raise rates in September anyway. "Under previous leadership, avoiding surprises was sometimes a goal in itself," de Chazal wrote. "Under the new leadership, restoring the Fed's credibility may be considered a higher priority."