The Israeli Shekel is falling to the Dollar over war concerns (Source: Google Finance)

In recent developments, the Israeli shekel has exhibited significant volatility, primarily due to escalating tensions along Israel's northern border. This week, the currency has seen a sharp depreciation, losing over 2% of its value against major global currencies like the US dollar and the euro. This trend underscores the shekel's heightened sensitivity to geopolitical dynamics, particularly the intensified activities on the northern front.

During volatile forex trading sessions, the shekel's decline was pronounced, reflecting investors' concerns over the potential impact of regional tensions on Israel's economy. Despite this downturn, late morning inter-bank trading showed a slight recovery, with the shekel gaining 1.20% against the dollar, reaching NIS 3.651/$, and improving by 1.07% against the euro to NIS 3.99/ā‚¬. This rebound followed the Bank of Israel's recent adjustments, which included setting the representative shekel-dollar rate at NIS 3.608/$, up by 0.838% from the previous Friday, and the shekel-euro rate at NIS 3.948/ā‚¬, a 0.905% increase.

In an interview with the Israeli financial news outlet, Globes, Ronen Menachem, chief economist at Mizrahi Tefahot Bank, attributed the shekel's initial depreciation to the forex market's acute reaction to a potential security escalation on the northern front. Menachem highlighted that, before this period of depreciation, the shekel had been on an upward trajectory, bolstered by positive economic indicators. This included encouraging state budget figures and the Bank of Israel's decision to maintain the interest rate, signaling confidence in the economy's resilience.

Conversely, Yossi Frank, general manager at Energy Finance and Risk Management, pointed Globes to speculative trading by foreign banks as a significant factor behind the currency's fluctuations. According to Frank, the cessation of the Bank of Israel's dollar-selling interventions to stabilize the market has left room for speculation, with foreign banks playing a predominant role in trading activities. This scenario has created an environment ripe for speculation amidst the uncertainty in Israel.

Despite the current volatility, forecasts from both domestic and international banks suggest an optimistic outlook for the shekel, anticipating a future strengthening against the dollar. Frank mentioned that the market is keenly observing Israel's internal and external developments, including the implications of judicial reform and the outcome of the conflict in Gaza, which is expected to favor Israel and potentially bolster the shekel's value. However, Frank also cautioned that a significant escalation on the northern front could adversely affect the currency.

Looking ahead, Menachem predicts continued volatility in the forex market, emphasizing the importance of the Bank of Israel's vigilance. He noted that the central bank is prepared to intervene by selling foreign exchange reserves if it perceives an unjustified depreciation of the shekel based on economic fundamentals. This proactive stance underscores the central bank's commitment to maintaining stability in the face of geopolitical and economic uncertainties.

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