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Shekel Nose Dives after Passage of Controversial Judicial Reforms

Shekel NIS

The New Israel Shekel (NIS) dropped sharply on Monday against the Dollar, falling by 2.414% in value. The exchange rate set by the Bank of Israel at the end of the day marked a three-year low for the Shekel at 3.6490 to $1. The Shekel also dropped 3.064% against the British Pound and 1.889% against the Euro.

In addition, all of the major indices on the Tel Aviv Stock Exchange fell in trading on Tuesday as well.

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The drop in the Shekel’s value came in spite of the fact that on Monday the Bank of Israel raised the interest rate by 0.5 percentage points to 4.25 percent, a move that should have caused an increase in the value of the Shekel. Interest rate hikes tend to raise the value of a nation’s currency.

But it also came after the judicial reform plan proposed by Israel’s government passed its first hurdle in the Knesset Monday evening in a preliminary vote.

Israel’s opposition leaders, as well as many financial analysts, see a correlation between the recent decline in the Shekel’s value with the Israeli government’s plans for judicial reform. The government of Prime Minister Benjamin Netanyahu is pushing for changes to Israel’s judicial system that would greatly curtail the authority of its Supreme Court to nullify laws passed by the Knesset should they violate basic democratic principles or to review actions of the government.

The opposition in Israel says this will harm Israel’s identity as a democratic state and warned that this would scare off foreign investors who would lose confidence in the country’s stability. Local business leaders agree; some companies have even begun moving their assets abroad. Even large American financial firms like Goldman Sachs have issued warnings about the future of Israel’s economy should the judicial reforms be enacted.

Citigroup has reportedly predicted that the Shekel would drop to a low of 3.95 to the Dollar.

Citigroup strategists Luis Costa and Bhumika Gupta said in a report “Despite Bank of Israel’s mildly surprising 50-basis-point hike yesterday, the currency continues to remain under pressure from local political noise. The political situation seems likely to get more volatile in the coming weeks as judicial reforms head for a second reading in the parliament.”

Peter Kisler, a London-based hedge fund manager at Trium Capital, told Bloomberg, “It’s the judicial reform continuing to weigh on the market. The magnitude of the currency’s move has been quite large, but it can still weaken further.”



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