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Israeli Politics

Shekel Falls to Three Year Low Against the US Dollar

Many link the drop in the Shekel against all major foreign currencies to the government’s controversial judicial reform plan.

The Shekel fell to a three year low against the US Dollar on Wednesday. It finished the day – according to the official report from the Bank of Israel (BOI) – trading at 3.7310 Shekels to the Dollar, having lost 1.607% in value for the day.

Three years ago the world was stuck in the middle of the worst part of the Covid crisis. So, with no tourism and no opportunities to court potential investors. So, what happened now? What could have caused the Shekel to lose 4% in value against the US Dollar since the start of 2023?

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And that is not all. The Shekel also fell in value against all of the major currencies on Wednesday.

The Shekel fell against the British Pound to a rate of 4.6162 Shekels to the Pound, against the Euro to a rate of 4.0123 Shekels to the Euro and against the Japanese Yen to a rate of 269.39 to the Yen.

And all of this happened despite Tuesday’s decision of the BOI to raise the interest rate in Israel by rate by a further 0.25%, the tenth consecutive such hike in recent months. An interest rate hike by a nation’s central bank should cause that country’s currency to go up in value. This is because a higher rate means a tightening of the money supply and so the laws of demand kick in. Fewer Shekels available should have meant that with the demand remaining the same on open markets it should have increased in value.

But it didn’t.

In explaining the decision to raise the rate, the BOI pointed out that inflation in Israel over the past 12 months remained above the upper bound of the target range, at 5 percent, and was high in a wide range of CPI components. Looking at the past 6 months, and even more so over the past 3 months, the pace of inflation was lower than the year-on-year inflation.

But the entire world is suffering from inflation these days and in Israel the inflation rate has been lower than in other countries. So again, why is the Shekel plummeting?

Well, financial experts have been saying for some time that the judicial reforms planned by the government of Prime Minister Benjamin Netanyahu will lead to concerns around the world about Israel’s political stability. This, in turn, would scare off potential foreign investors and with a drop in such investment comes a drop in the Shekel’s value. Also, some Israeli firms have been taking their money out of the country for the same reason which means more Shekels sold for foreign currency and this causes the Shekel to drop.

Massive protests have rocked Israel over the past few months, ever since Justice Minister Yariv Levin revealed the government’s plans to alter the nature of Israel’s judicial system. The government’s judicial reform plan would greatly curtail the power of Israel’s Supreme Court to nullify legislation passed by the Knesset and also limit the authority of Israel’s attorney general. The opposition charges this would harm Israel’s democracy, eroding foreign confidence in the country and hurting its economy. And this is why the country is now on the brink of what some are describing as the biggest societal clash in Israel’s history.

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