Israel’s shekel has recouped the bulk of its losses since the war between Israel and Hamas began a month ago, with the central bank’s support helping to tame volatility and discourage bets against it.
The currency is less than 1% away from erasing the depreciation seen since Oct. 7, the day the war began. It’s recovered about 5% of its value against the dollar since reaching an 11-year low late last month.
Later on Tuesday, the central bank will publish its monthly report on foreign reserves, giving investors a first look at how much it spent to shore up the currency. At the onset of the conflict, the Bank of Israel pledged to sell as much as $30 billion from its roughly $200 billion in foreign-currency reserves — and to provide as much as $15 billion more via swaps — to support the shekel.
The bank has enough reserves “to credibly counter sharp weakening moves,” strategists at Goldman Sachs Group Inc. said in a report published last week. Financial inflows from abroad, including aid, will also buoy the shekel in the coming months, the strategists including Kamakshya Trivedi wrote, predicting it would continue to trade around current levels absent further geopolitical escalation.
The shekel traded 0.3% stronger at 3.8799 against the dollar as of 11:15 a.m. in Tel Aviv on Tuesday. It had weakened to as low as 4.0855 on Oct. 26 before strengthening on six of the seven days that followed.
Stock, Bonds
Israel’s stock index has likewise regained its footing, climbing about 6% from a two-and-half-year low reached on the same day the shekel hit its recent bottom.
Expected swings in the shekel — as measured by one-month implied volatility — fell on Friday to levels last seen before the hostilities erupted.
The market consequences of the war are more evident in the bond space, with investors wary after warnings from credit rating agencies brought Israel closer to its first-ever downgrade. Analysts expect the war to lead to an economic contraction this quarter and send the budget deficit soaring as spending increases.
The cost to insure Israeli government debt from default declined to 130 basis points on Monday, but it’s still near a decade-high of about 145 basis points reached two weeks ago. Even before the war, the nation’s assets had been under pressure from protests and turmoil surrounding the government’s moves to take more control over the judicial system.
“The risk of a sovereign credit-rating downgrade remains elevated due to the conflict but also due to judicial reforms weakening governance, and fiscal stimulus that is set to be deployed to offset the economic impact of the conflict,” said Brendan McKenna, a New-York based emerging-markets strategist at Wells Fargo Securities.