Israel’s shekel in record high against dollar, trend expected to continue

Israel’s currency, the shekel, has hit a record high against the U.S. dollar in a trend that is expected to continue unless the central bank will make an unexpected change in its policy.

Last week, the shekel traded at 3.36 for one dollar, a nine-year high.

The American currency has been weakening in recent months against other currencies as the U.S. is also struggling to cope with the global COVID-19 crisis.

But in Israel, the strengthening of the shekel has been ongoing in recent years which has only been intensified by the pandemic.

“The main reason for this trend is the strengthening of the hi-tech industry and massive investments and purchases in the industry which are ongoing,” said Benjamin Bental, professor of economics at the University of Haifa, “The hi-tech is extremely dominant in the development of the Israeli economy and therefore this trend is expected to continue.”

According to the Israel Export Institute, hi-tech exports from the country are almost fifty percent of all of Israeli exports to the world. The majority of the exports within the hi-tech industry are in software and computerization. Many Israeli firms which specialize in products that allow for distance healthcare, learning and cybersecurity have benefited from the COVID-19 crisis which has increased the need for their goods.

With all the benefits that Israel has reaped from its booming hi-tech sector, there are unwanted side effects that have augmented as the pandemic aftershocks continue to impact the market.

Unemployment in Israel has risen an all-time high since COVID-19 measures intended to curb the spread of the virus were implemented in March this year. Currently at approximately twenty percent, it was at a record low of less than four percent before the pandemic. Even as measures were lifted, the economy has been slow to recover.

The tourism sector which relies heavily on foreign tourists has been dealt a devastating blow with no recovery for it in sight. Israelis are also travelling less, decreasing the demand for foreign currency.

“This is a structural crisis,” Bental told Xinhua, “It is the job of the state and society to protect workers on the one hand, but they need to be incorporated back into the work force as soon as possible in other industries.”

“There needs to be intervention by giving them training for new jobs and by rectifying the workforce, not by intervening in the exchange rate in any manner,” he added.

According to data released by the Bank of Israel (BOI) in the beginning of the month, Israel’s foreign currency reserve is almost forty percent of the country’s Gross Domestic Product (GDP) and one of the highest in the world.

In recent decades, the BOI has adopted a policy of minimal intervention in the market and has only done so when recognizing local instability. In the beginning of the current crisis, the central bank loaned Israeli banks U.S. dollars in order to guarantee liquidity. This move has not been repeated since.

“Our competitiveness and the profitability of our exports has been hurt,” said Dani Catarivas, director general of Foreign Trade and International Relations at the Manufacturers Association of Israel, “This has been going on for a very long time but has intensified in the recent crisis. Increasing the foreign currency reserve by the BOI is important.”

Israel is a small player in the global economy and the weakness of the dollar is a trend that many economies are dealing with. It remains questionable whether much can be done.

“There are objective reasons that the shekel has strengthened so, but in order not to deal a further blow to Israeli exports, the government needs to deal with the shekel expenditure that businesses have,” Catarivas told Xinhua.

Catarivas is calling for the government to decrease tax rates for enterprises who make their profit in U.S. dollars while still spending in Israeli shekels.