The extraordinary strength of the shekel is a phenomenon unjustified by fiscal conditions and will likely come to an end in 2018, according to an Israeli market analyst writing in Globes on Tuesday.
Alex Zabezhinsky, chief economist of Meitav Dash Investments, noted that the shekel has gained 12 percent over the U.S. dollar over the past five years, while “no other currency in the world strengthened against the dollar during this period.”
“It appears that the shekel has strengthened too much, beyond economic equilibrium. It is not yet on the scale of bitcoin, but it is in the same direction.”
“This unusual result can be attributed to the strength of the Israeli economy or the Israeli startups snatched up by foreign companies, but the truth is that no explanation can justify such a wide gap between the shekel and the rest of the world,” Zabezhinsky wrote.
What does keep driving the shekel?
He faults the Bank of Israel, “which cut the interest rate too fast, and has been left with no tools, thereby aggravating aggressive speculative activity in the Israeli currency… Another factor is the herd of investors blindly stampeding in one direction, while mindlessly repeating that the shekel can only get stronger.”
Zabezhinsky looks to next year for a correction in the value of the Israeli currency.
That’s because the Israeli economy shows signs of weakening, as the growth rate has slowed. Invoking the dictum of former Bank of Israel Chairman Stanley Fischer, he says, when the economy weakens, the currency can also weaken.
The action of central banks around the world will also have an impact. For example, the U.S. Federal Reserve is likely to raise the interest rate, thereby opening a 2 percent gap between its rate and that of the Bank of Israel by the end of 2018. Continued improvement in the global economy will encourage other banks to follow suit, while the Bank of Israel is expected to hold steady.
Those and related factors will probably help to bring the shekel back to normal as well, “to revert to behaving like every other currency around the world.”