Thursday, June 12, 2008

The strong shekel

"The Israeli shekel is the strongest currency in the world!" Take a moment to savor that incredible concept. This was stated by an economics expert who spoke to a group regarding investment opportunities. While this may be somewhat of an exaggeration, nevertheless, the shekel has undoubtedly increased in value relative to the dollar over the past year (from ca. 4.4 to 3.4, a 22% increase). The factors causing this increase are mainly the weakness of the dollar itself, that has decreased in value relative to most other international currencies, and the cost of oil, that has sky-rocketed from what was considered a high of ca. $70 per barrel, to now when it is twice that!
Since the dollar has been the main international currency, most investors had put their money in the dollar. One reason that has accelerated its slide has been the transfer of funds from the weaker dollar to other stronger currencies. These include the Euro, the Yen and yes, the shekel!
As a result of the strength of the shekel the international agency that controls the convertibility of currencies (the Continuous Linked Settlement Bank in NY) has added the shekel to its short list of 14 convertible currencies (see ). This means that henceforth shekels can be traded and exchanged anywhere in the world where there is a money market. This is quite a coup for Israel, long gone are the days when the Israeli Govt. had to control the amount of shekels that people could convert and take out of the country.
One corollary that supports the contention that the shekel is strong is the strength of the Israeli economy. Notwithstanding the political situation, both internal regarding PM Olmert's pending criminal charges, and external regarding Iran and Gaza, the Israeli economy has continued to grow and strengthen. Annual average increases in GDP per capita have been somewhere around 5-6% annually, and the growth and stability of the economy has attracted foreign investment. It is even rumored that certain Arabs have bought shekels as a hedge against the dollar's weakness.
Actually in the past week the shekels gradual increase in value relative to the dollar was somewhat reversed when Min. of Transportation (and former Min. of Defense and Chief of Staff) Shaul Mofaz made a public statement that Israel would have to attack Iran to stop its nuclear program. While this might be a possibility, Mofaz has been widely criticized for both discussing future government plans and giving away Israel's possible strategy. A similar situation existed regarding the Gaza Strip and the Hamas Govt. there. Last week Min. of Defense Ehud Barak said that the time had come for Israel to take military action to stop the daily rocketing of Israeli territory. This also contributed to the slight fall of the shekel. But, today, after a Cabinet meeting, he reversed himself and the Cabinet decided to send another representative to Cairo to engage in talks with Egyptian mediators with Hamas. There are now reports that a temporary ceasefire may be in effect by next week. So while Israel avoids military action the shekel will continue its climb.


Post a Comment

<< Home