In the shadow of the dollar's decline: The shekel is again the world's strongest currency
The dollar is at a low and Israel's real interest rate is attracting demand for the local currency. The shekel has strengthened by 2.5% in a month, but IBI estimates that the fading of foreign exchange factors will push inflation back up in the second half of the year.
The shekel is strengthening again this morning against the dollar and is trading at just under 2.95 shekels.
According to Meitav, the shekel has returned to being the strongest currency in the world over the last month, contributing to the moderation of inflation; the local currency has strengthened by about 2.5% against the dollar. The euro, for example, strengthened against the dollar by only 1.5% in the same period, and the pound by 1.8%. The dollar itself has weakened to its lowest level in about two months.
The positive trend on Wall Street (the S&P 500 rose by more than 3% in the last month) and the weakening of the dollar globally come after investors reduced expectations for further interest rate hikes by the Federal Reserve, following a series of weaker-than-expected economic data from the US.
The dollar index (DXY) is falling for the third consecutive day, reaching its lowest level since May 15. Market traders have reduced the probability of a Fed interest rate hike next month to only about a third, compared to about 75% at the end of July. The key event that may affect the dollar this week is expected to be the publication of the FOMC meeting minutes from July on Wednesday.
As mentioned, inflation in the US is weakening. In annual terms, Bloomberg notes that based on the last three months, the inflation rate stands at 0.8% for the headline index and 1.6% for the core index. Furthermore, in the calculation based on six months, a moderation is evident, as core inflation fell below 2.5% for the first time since 2021. According to the Bloomberg index that analyzes messages from Fed speakers, the level of "hawkishness" has detached from actual inflation. Implicit inflation expectations are at relatively low levels.
High real yield in Israel
In Israel, inflation has stabilized in recent months below the center of the target range, but the downward trend is close to exhaustion, estimates Rafi Gozlan, chief economist at IBI.
"The moderation during the last months to below the center of the target range was partly due to temporary factors, primarily the strengthening of the shekel. The gradual fading of this effect, while the economy is characterized by a tight labor market with excess demand, is expected to lead to a rise in the inflation environment later this year. Therefore, we estimate that inflation is expected to climb back towards the center of the target range in the last quarter of the year, and rise by 2.2% in the coming year."
Gozlan further adds: "On the other hand, the real interest rate derived from actual inflation and inflation expectations is relatively high and hovers around 1.75%-2%. In addition, in recent days the appreciation of the shekel has resumed to levels below 3 shekels." That is, this real yield makes shekel-denominated assets more attractive and attracts demand for the local currency.
We also recall the July inflation data published on Friday (a monthly increase of 0.3% and a slight decrease in the annual inflation rate to 1.5% - against 1.6% in June). The Bank of Israel's response will come at its next meeting on September 1 (currently standing at 3.5%).
Added to this yesterday were encouraging local growth data - GDP jumped by 15.4% in the second quarter in annual terms (3.6% in quarterly terms), after a decline of 3.8% in the first quarter, which included Operation Guardian of the Walls.
