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Booming global markets kept shekel ‘too strong,’ says ex-Bank of Israel deputy head

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Israel’s shekel has been “too strong and under undue pressure” — propped up by the until now booming international stock markets — and a market correction, as we are seeing in recent days, or even a stabilization of global capital markets, will weaken the nation’s currency, which hit a 26-year high earlier this month against the dollar, former Bank of Israel deputy governor Nadine Baudot-Trajtenberg said in an interview with The Times of Israel.

Global markets are reacting with alarm to the spread of the COVID-19 Omicron variant, sending the Dow Jones Industrial Average to its biggest single-day drop of the year on Friday and wiping out November gains for the S&P 500 index.

The shekel saw its representative rate set at NIS 3.0740 to the dollar on November 17, the highest rate since 1995. The shekel weakened against the dollar on Thursday and Friday, and the representative rate was set at NIS 3.1810 to the dollar on November 26, on jitters about the Omicron variant.

Baudot-Trajtenberg said on Sunday: “We have exactly the event that supports this: the markets are going south in light of the new variant and the shekel has indeed weakened. It just goes to show the strong link between the two.”

The currency had been propped up by the global weakness of the greenback, booming global stock markets, and a COVID-induced push toward technologies, which has benefited Israeli tech firms. In addition, large Israeli institutional investors have been hedging their investments in foreign stock markets by selling foreign currency reserves.

The shekel has also been buoyed by the strong fundamentals of the Israeli economy. The nation has a big surplus in the balance of payments current account because its exports exceed imports, mainly due to its strong high-tech industry, which is seeing rapid revenue growth and attracting large amounts of foreign investment.

This foreign investment increased significantly during the pandemic, as the world increasingly went online and underlined the importance of technologies, leading to record foreign investment in Israeli tech firms, sky-high valuations for both privately held and publicly traded tech firms, and the creation of an unprecedented number of tech unicorns, or private companies valued at over $1 billion.

“The shekel has been strengthening for 10 years and this long-term trend is a reflection of the fact that the Israeli economy is doing well and there are lots of funds coming in,” said Baudot-Trajtenberg.

The big question, she added, is whether at this time “there is an unusual constellation that is temporary, keeping the shekel too far from what we could estimate is an equilibrium level.”

And the answer is yes, she asserted. During the past two years there has been a “disconnect” between the financial markets, the capital markets, and the real economy,........

© The Times of Israel

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