Dollar's slide against shekel expected to continue

February interest rate to remain at 4.25%.

financial graph 88 (photo credit: )
financial graph 88
(photo credit: )
The dollar is poised to continue its slide against the shekel over the coming week on expectations that inflationary pressures will prevent the Bank of Israel from cutting the base lending rate and rising speculation over another interest-rate cut by the US Federal Reserve Board. "On the one hand, the shake-up of world markets over the last few days increased speculation about interest-rate cuts by other central banks, which could give support for dollar strengthening. But on the other hand, dramatic interest-rate cuts in the US are pointing to a further weakening of the dollar," Finotec senior analyst Sagiv Peretz said Thursday. "Following Tuesday's emergency move by the Fed of cutting interest rates by 75 basis points to 3.5 percent, the market now expects a 50% chance for another rate cut of 0.5% when the Fed meets next week." Should this happen, we would experience an interest-rate cut of 1.25% within eight days to 3%, marking the most dramatic move since the inception of the Federal Reserve," he said. "The move will widen the interest-rate gap between Israel and the US, which in turn is expected to further strengthen the shekel against the dollar." The US dollar continued its downward spiral Thursday, dropping an additional 0.8% against the shekel and trading at NIS 3.681 at the close. It fell 2.2% on Wednesday, when it closed at 3.735. Over the past two weeks the shekel-dollar exchange rate fell 3.5%. "As the interest-rate par between Israel and the US continues to widen, the shekel will gain more ground against the dollar to a level of NIS 3.62 over the next few days," Peretz said. "Should the Fed cut interest rates by 0.5%, we will see this level breaking." Manufacturers Association of Israel president Shraga Brosh this week urged the Bank of Israel to cut the local interest rate by 0.5% in the aftermath of Tuesday's interest-rate cut by the Fed and expectations of another cut next week. "It will be a catastrophe for the industry, hurting exporters if the interest rate is kept as is," he said. "In the current economic climate, we cannot have such an interest-rate gap between us and the US." However, with inflation above target and the possibility of another round of price hikes, expectations are that Bank of Israel Governor Stanley Fischer could raise the interest rate by a further 25 basis points or leave the base lending rate unchanged at Monday's rate decision. Following the estimates of another interest rate cut of 0.5% in the US, there is a consensus among analysts that the Bank of Israel will leave interest rates for February at 4.25%, widening the interest-rate gap between Israel and the US to 1.25%. "After the Fed decision, and assuming another interest rate cut of 0.5%, we expect Fischer to leave interest rates unchanged despite growing inflationary pressures," Michael Sarel, chief of economics at Harel Insurance & Finance Ltd., said Thursday. Similarly, analysts at Leader Capital Markets Ltd. predicted that the central bank will keep the February interest rate unchanged. "As long as the shekel-dollar exchange rate stays below 3.80 shekels per dollar and the price of crude oil hovers around $90 per barrel, Fischer will prefer to hold off an interest-rate hike," an analyst at Leader said Thursday.