Currency War and Peace

DailyFX

Political developments are key factors in the ongoing “currency wars,” as evidenced by recent gains sustained by the Israeli shekel versus major currency counterparts like the US dollar and euro.

The Bank of Israel (BoI) was at one time very active in the foreign exchange markets, making a big effort to prevent the Israeli shekel (ILS) from strengthening against the US dollar (USD). The policy of Governor Stanly Fischer drew criticism at the time, but was later praised and seen as a smart policy that kept the Israeli economy relatively untouched amid the global financial crisis.

After the recent round of elections in Israel, Fischer announced that he will step down on June 30, earlier than expected. It now seems he will have one more currency war to fight.

See related: A “Currency War” Strategy That’s Failing

US President Barack Obama paid a three-day visit to Israel in mid-March. The visit helped warm up relations between Israeli Prime Minister Benjamin Netanyahu and Obama, as well as the relations between the two countries. The visit also reaffirmed US support to Israel.

During his visit, Obama also made an important speech during which he called for the revival of the peace process. This was followed by a visit by Secretary of State John Kerry and an even more important development: reconciliation between Israel and Turkey.

Turkey and Israel have been at odds after the events of the Mavi Marmara in May 2010. During the conflict, Israel took over a flotilla from Turkey to Gaza in a violent clash that resulted in nine Turkish casualties. There is still no agreement on what exactly happened there, but it undoubtedly soured relations between the two countries and caused a headache for the US, which cooperates closely with both nations.

The political developments and reconciliation are positive for the Israeli shekel, which reached new highs. At the time of writing, the USDILS is at 3.63, the lowest level since late 2011. Additionally, EURILS is at 4.67, which is the lowest level since early 2012. The US and Europe are Israel’s main trading partners.

Part of the recent shekel strength can be blamed on low liquidity due to the Passover holiday, but this is certainly not the main reason. For Israelis spending the holiday abroad, these developments are good news, but for Israel’s technology-oriented export sector, this comes as decidedly bad news.

It will be interesting to see if the BoI will intervene in the markets and buy foreign currency given the latest developments. On one hand, Fischer would not want to leave his successor a stronger currency, but he wouldn’t want to increase Israel’s foreign exchange reserves, either.

The BoI was one of the first central banks to raise interest rates after the global financial crisis. Fischer was the chief economist of the World Bank and also worked with the International Monetary Fund (IMF) and Citigroup. His actions are watched beyond the boundaries of Israel.

In the meantime, the risk-on/risk-off dynamics of forex are seemingly changing. (Read more about changing risk dynamics on Forex Crunch.)

By Yohay Elam of Forex Crumch

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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