Israel’s shekel has recouped its losses since the war between Israel and Hamas began, with the central bank revealing on Tuesday that it sold more than $8 billion in October to defend it.
The currency rose as much as 1.1% to 3.8467 against the dollar as of 2 p.m. in Tel Aviv, virtually erasing the steep depreciation seen since Oct. 7, the day the war started. It fell for 14 straight days when the conflict began, and hit an 11-year low of 4.0855 per dollar late last month.
The Bank of Israel announced Tuesday that it sold $8.2 billion in October. At the onset of the war, the central bank had pledged to sell as much as $30 billion from its foreign-currency reserves — and to provide as much as $15 billion more via swaps — to support the shekel.
The bank has enough reserves “to credibly counter sharp weakening moves,” strategists at Goldman Sachs Group Inc. said in a report published last week. Financial inflows from abroad, including aid, will also buoy the shekel in the coming months, the strategists including Kamakshya Trivedi wrote, predicting it would continue to trade around current levels absent further geopolitical escalation.
The currency interventions led to a $7.3 billion drop in Israel’s foreign reserves last month to $191.2 billion, the lowest in a year. Reserves are equal to nearly 40% of the nation’s gross domestic product.
Stock, Bonds
Israel’s stock index has likewise regained its footing, climbing about 6% from a two-and-half-year low reached on the same day the shekel hit its recent bottom.
Expected swings in the shekel — as measured by one-month implied volatility — fell on Friday to levels last seen before the hostilities erupted.
The market consequences of the war are more evident in the bond space, with investors wary after warnings from credit rating agencies brought Israel closer to its first-ever downgrade. Analysts expect the war to lead to an economic contraction this quarter and send the budget deficit soaring as spending increases.
The cost to insure Israeli government debt from default declined to 130 basis points on Monday, but it’s still near a decade-high of about 145 basis points reached two weeks ago. Even before the war, the nation’s assets had been under pressure from protests and turmoil surrounding the government’s moves to take more control over the judicial system.
“The risk of a sovereign credit-rating downgrade remains elevated due to the conflict but also due to judicial reforms weakening governance, and fiscal stimulus that is set to be deployed to offset the economic impact of the conflict,” said Brendan McKenna, a New-York based emerging-markets strategist at Wells Fargo Securities.
(Adds size of foreign-currency sales in third paragraph and size of foreign reserves in fifth, updates prices in sixth paragraph)
