Shekel rallies against dollar to NIS 4.875

The shekel is gaining ground against the dollar to NIS 4.875, 0.57% short of Monday's representative exchange rate, NIS 4.904.

In Sunday options trade, the dollar had crossed through NIS 4.95.

Excellence dealing rooms noted that despite the calming dollar rush in the last two days, the general currency market trend is shekel devaluation. Excellence said that any shekel gain triggers massive sell-offs of the local currency by market entities. Excellence related the relative weakening of the dollar over the last two days to currency conversions by exporters. Without these conversions the dollar would have traded at much higher levels, Excellence remarked.

Excellence said that the dollar level depends on how the public will act. If the public doesn't rush to buy dollars, the dollar could return to trade at NIS 4.82 to NIS 4.85. But should the dollar cross through NIS 4.92, this will clearly signal that the dollar is likely to go on rising and break new records. Given this, Excellence said that Bank of Israel Governor David Klein should immediately raise lending rates by at least 1%.

Amir Tal from Discount Bank said that even a 1% interest rate hike isn't likely to significantly affect medium term shekel devaluation. He bases this on the estimate that foreign credit-rating companies will lower Israel's sovereign rating if the budget deficit exceeds its target. Lowering Israel's credit rating is expected to be a significant factor in the shekel losing ground against the dollar, Tal said.

Joseph Fraiman from investment bank Prico estimates that the uncertainty surrounding the emergency economic plan won't last long and will probably vanish in coming weeks. Fraiman expects that the economic plan to be completed by the beginning of the summer, when the Knesset is due to recess. Fraiman bases this on the fact that after the recess the government will get ready for national elections, and won't be keen to impose economic measures that won't benefit constituencies.

Fraiman believes that the recommendations of the Rabinovitch tax-reform committee have long-term structural implications on dollar demand. The recommendations are expected to lead to imposing tax on shekel instruments.

Fraiman said that should the gap drop between tax imposed on shekel instruments and dollars, many institutional entities are likely to create dollar demand as part of changing portfolio strategy. Fraiman expects the general public to join this structural portfolio change. Fraiman estimates that the exchange rate, which assimilates this structural change, will rise over NIS 5.

Shekel devaluation will be gradual and last some time, Fraiman said. Most money converted into dollars will remain in Israel through investments in government dollar bonds, Fraiman said.

Fraiman added that two forces operate in favor of shekel appreciation in the short and medium term. The first is the high probability of an interest rate hike, and the second is global economic recovery. The latter is expected to lead to the injection of investments into foreign markets, including Israel.

The current price of the dollar incorporates potential for technical correction, Fraiman noted.