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The Bank of Israel said on Monday it planned to sell up to $30bn of dollar reserves to support the shekel after the market fallout from Hamas’s attacks on the country pushed the currency to a seven-year low.
The shekel fell more than 2 per cent against the dollar to its weakest level since 2016, before recovering slightly to trade 1.8 per cent lower at Shk3.9155 following the central bank’s announcement.
The central bank, which has about $200bn of foreign currency reserves, said it wanted to “moderate volatility in the shekel exchange rate and to provide the necessary liquidity for the continued proper functioning of the markets”.
As well as the $30bn programme, the Bank of Israel said it would provide liquidity to the market of up to $15bn through swap agreements.
“We think it is unlikely that we will see a massive sell-off in the currency because the central bank has ample reserves to keep it stable,” said Kaspar Hense, senior portfolio manager at RBC BlueBay Asset Management.
The move follows one of the deadliest attacks on Israel for decades. Israel’s prime minister Benjamin Netanyahu declared that the country was “at war” after Hamas sent militants across the border from Gaza, killing hundreds of Israelis and taking others captive.
The shekel had already been one of the worst-performing major currencies this year, down 9.8 per cent against the dollar, fuelled by investors’ concerns over the government’s efforts to weaken the power of the judiciary. Analysts said a widening budget deficit could also push the currency lower.
“We believe one important implication from the latest conflict is a possible deterioration in an already uncertain Israeli fiscal outlook,” said analysts at Citi, who said they now see “downside risk” to their forecast of a 2.5 per cent budget deficit in 2024.
Israel’s dollar bonds suffered some of the heaviest losses among emerging markets. Its 2120 “century bond” suffered its biggest ever daily decline of 4.6 cents on the dollar to 64.9 cents, the lowest level since the bond was sold in 2020. Trading was limited on Monday owing to a market holiday in the US.
“We don’t see a reason why you would be long Israel’s currency or bonds,” said Hense. “There is high geopolitical risk.”
Israel’s benchmark TA-35 stock index extended losses on Monday, trading 1.2 per cent lower. On Sunday the index fell 6.2 per cent, its biggest daily loss in almost three years.
The fallout extended to markets across the Middle East, with Dubai’s benchmark index of 20 stocks down 2.9 per cent.
