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The Bank of Israel said on Monday it planned to sell $30bn in dollar reserves to support the shekel, after a market slump over attacks by Hamas on the country pushed the currency to a seven-year low.
The shekel fell more than 2 percent against the dollar to its weakest level since 2016, before shedding 1.8 percent to trade at Shk3.9155 following the central bank’s announcement.
The central bank, which has about $200 billion in foreign exchange reserves, said it wanted to “reduce moderate volatility in the shekel exchange rate and provide the necessary liquidity for the continued proper functioning of markets.”
Along with the $30 billion plan, the Bank of Israel said it would provide up to $15 billion of liquidity to the market through swap contracts.
“We think it’s unlikely that we’ll see a massive selloff in the currency,” said Kasper Hens, senior portfolio manager at RBC BluePay Asset Management.
The move is one of the deadliest attacks on Israel in decades. Israel’s Prime Minister Benjamin Netanyahu declared the country “at war” after sending Hamas fighters across the border from Gaza, killing hundreds of Israelis and taking others prisoner.
The shekel was already one of the worst-performing major currencies this year, falling 9.8 percent against the dollar, fueled by investor concerns over government efforts to weaken the power of the judiciary. A widening budget deficit could also weaken the currency, analysts said.
“We believe an important implication from the latest conflict is a possible deterioration in the already uncertain Israeli fiscal outlook,” said Citi’s analysts, who said they see “downside risk” to their forecast of a 2.5 percent budget deficit in 2024.
Israel’s dollar bonds suffered some of the sharpest losses in emerging markets. Its 2120 “Century bond” suffered its biggest daily decline, down 4.6 cents to 64.9 cents on the dollar, the lowest since the bond was sold in 2020. Trading was limited on Monday due to a market holiday in the US.
“We see no reason why you should be long Israel’s currency or bond,” Hens said. “There is more geopolitical risk.”
Israel’s benchmark TA-35 stock index extended losses to trade 1.2 percent lower on Monday. The index fell 6.2 percent on Sunday, its biggest daily loss in nearly three years.
The fall extended to markets across the Middle East, with Dubai’s main 20-share index down 2.9 percent.
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