Shekel strengthens, dollar weakens, and trade industry braves the storm

The shekel is now 11% stronger than it was at this time last year, with one dollar trading for 3.4 shekels, according to the Bank of Israel rate on Monday.

JANUARY 15, 2018 18:19

Updated: JANUARY 16, 2018 01:03

Dollar and shekel, side by side (photo credit: THOMAS WHITE / REUTERS) — Dollar and shekel, side by side

(photo credit: THOMAS WHITE / REUTERS)

With the shekel strengthening against the US dollar to a seven-year high, the exchange rate is undermining Israeli exporters, driving up the cost of hi-tech services and offering Israeli customers a far cheaper vacation abroad.

The shekel is now 11% stronger than it was at this time last year, with one dollar trading for NIS 3.40, according to the Bank of Israel on Monday. At the beginning of 2017, the dollar was trading for NIS 3.80. At the same time, the euro has slightly strengthened against the shekel by 0.2% to 4.17151.

“I think there’s something excessive in the shekel’s strength. The Israeli currency should be strong but it’s too much,” Alex Zabezhinsky, chief economist at Meitav Dash investment house, told The Jerusalem Post.

While Israeli customers benefit from cheaper imported toiletries and consumer goods – with the strong shekel helping to keep inflation close to zero for the past five years – hi-tech firms are grappling with much higher costs. A stronger shekel drives up the cost of service and industry exports because it makes them more expensive for consumers abroad to buy.

“Entrepreneurs will have to decide whether they want to start up their teams here or abroad, and this is terrible for the State of Israel,” said Nir Zohar, president and COO of Wix.com, an Israeli web development company listed on NASDAQ that employs some 2,000 people globally, three-quarters of them in Israel.

Israeli hi-tech firms mostly sell their products abroad in dollars while paying local salaries in shekels, and they now are lobbying the government to intervene. It is one of the first instances where the tech sector – which comprised some 12.5% of Israel’s economy in 2015 – is speaking publicly about the weak dollar-to-shekel ratio and its consequences.

“One is that I’m absorbing more and more of it,” Zohar told the Post. “I’ll post lower cash flow positivity than before. Or alternatively, I won’t hire more people in Israel and will hire people in cheaper places. Both are terrible options and we don’t want to choose either one.”

While the Bank of Israel and the Finance Ministry can intervene to slow the shekel’s growth – such as by purchasing foreign currency reserves to the tune of $2b. daily, as one economist proposed – it is unclear how effective those steps would be.

“I don’t think the Bank of Israel can do something special to change the rate,” said economist Zabezhinsky, adding that the central bank has already buying at least $100b. in currency stock was a crucial.

“One of the mistakes of the Bank of Israel was three years ago, when it cut the interest rate to zero percent. Because from zero, you cannot cut more. And if there are currency speculators, they know that the Bank of Israel has no real options.”

The shekel continues to strengthen and shows no sign of slowing because of Israel’s strong service exports, natural gas depositories and its current account surplus. In the past five years, the shekel has strengthened most against the dollar when compared to other major currencies.

The exchange rate may change only after that Israeli economy weakens due to fewer exports, Zabezhinsky added, with geopolitical trends or US policies also doing the trick. In the meantime, investors continue to clamor for buying shekels and are shying away from selling the currency.

With the hi-tech scene, other companies in the Israel Growth Forum – a lobbying group chaired by Zohar that represents dozens of Israeli tech companies, including Gett, CyberArk, Outbrain, Fiverr, Playtika and Mellanox – are feeling the strong shekel’s bite.

“For a small start-up that is raising money and has to worry that that money will dry up, a change of 10% to 15% in the dollar-to-shekel rate, is 10% to 15% less time to live. It’s a huge deal, in terms of the Start-Up Nation.”