Shekel gains against dollar, bucking global trend

As soon as it became clear yesterday that Donald Trump had won the US presidential election, the US dollar began to rise in the foreign exchange market, which is always the quickest of financial markets to respond. The DXY index, which measures the strength of the US dollar, rose 1.5% with strong gains against all of the world’s major currencies, losing only a small amount of ground today.

But the shekel bucked this trend, rising by 0.24% against the dollar, reaching 3.739/dollar, and also by 1.866% against the euro, reaching 4.008 shekels/euro. The shekel continued to rise against the dollar, with the Bank of Israel setting its representative interest rate by 0.348% to NIS 3.726/$, despite giving up a small amount of strong gains against the euro – the shekel rose 0.15% to NIS 4.014. /€.

Why Trump’s election strengthened the US currency and how the Israeli currency bucked the trend and gained more strength than the dollar, especially after Prime Minister Benjamin Netanyahu ousted Defense Minister Yoav Galant. The first time Netanyahu fired Gallant in March 2023, the shekel weakened sharply in the wake of public protests.

Mizrahi Bank chief economist Tefahot Ronen Menachem explains: “On the whole, I think the main and important thing regarding the dollar, in the context of Trump’s victory, is the fact that he and the Republican Party have a more deficit fiscal policy. Because to begin with, the United States is entering Trump’s second term with The debt-to-GDP ratio is very high (120%+), while the acceptable level for a developed country over time is 60% of GDP. A high interest rate on the dollar is a recipe for increasing the debt burden on the US economy. And the families are there.”

Menachem adds: “The more Trump’s policy increases the deficit, and if fiscal reduction measures are not taken, which will offset some of the expenses that his administration is planning, this means that there will be inflationary pressures. Trump’s policy also includes imposing customs tariffs on the import of raw materials and capital assets from External (such as imports from China), this also supports inflationary pressures, and in a difficult situation, it will be difficult for Federal Reserve Chairman Jerome Powell to continue to moderate interest rate cuts on the dollar rate cut path.”

The impact of the war will be greater than the impact of the US elections

As for Israel, Menachem says: “In general, what will determine the price of the shekel against the dollar is the local story that depends on the developments of the war. If there is a diplomatic settlement in the north, through pressure from Trump, who said in his speech: The victory speech is that he does not start wars.” Rather, it ends it, and in addition, there will be calm with Iran, which could lead to a strengthening of the shekel. An imminent political settlement in Israel could eventually lead to a strengthening of the shekel against the dollar even If the dollar strengthens in the world.” On the other hand, if war and uncertainty continue, the shekel may falter.

Menachem adds that the relationship between the White House and the Fed is also a factor to consider. “Trump’s first term was not the smoothest with Governor Powell. However, in the end, Powell’s term was extended. The question is whether the full independence of the Fed will be maintained, and no pressure will be put on him if he decides to do so.” Moderate interest rate cuts as a function of fiscal expansion that Trump may deliver.”

Finally, Menachem concludes that there is another aspect that may strengthen the dollar in the future, “It should be noted that the United States does not act alone in the world. We have our arena in the Middle East, relations between Taiwan and China and in other regions. If we see intensified geopolitical conflicts, it may rise.” The dollar is a safe haven currency in times like these.

Published by Globes, Israel Business News – en.globes.co.il – on November 7, 2024.

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