Market Extra: Israel-Hamas war sends shekel to 8-year low on fears of economic blowback

The Israeli new shekel touched its weakest level against the U.S. dollar in more than eight years on Monday as investors fretted about the potential economic blowback of a prolonged conflict with Hamas.

The shekel

traded as weak as 4.006 to the dollar on Monday, breaking above four to the U.S. dollar for the first time since March 20, 2015, according to FactSet data. Back then it traded at 4.057 as the U.S. dollar embarked on a broad-based rally that eventually brought it to near-parity with the euro.

This time around, the pressure appeared to come from concerns that Israel’s economy could suffer from the mass mobilization required of the war, as well as concerns about the potential for a broader conflict that could draw in other nations like Iran.

Matt Gertken, chief geopolitical strategist for Montreal-based BCA Research, said that the war has more than a 50% chance of drawing in militant groups from Lebanon or Syria, or producing a direct conflict with Iran.

See: 70% chance Israel-Hamas war spreads beyond Gaza, threatening oil, strategist warns

While Israel’s central bank has plenty of capacity to support the shekel, a lengthy conflict could ultimately strain both the Israeli economy and labor market, said a team of economists at Capital Economics.

“Israel’s economy has proven resilient to conflicts in the past and been able to adapt over time, which has often limited the direct impact on the economy. But a much larger and longer-lasting war this time risks larger spillovers to the labor market and economy,” said Nicholas Farr, emerging Europe economist at Capital Economics.

He added that the Bank of Israel is sitting on $200 billion in foreign reserves, which should allow it to comfortably support the shekel if selling pressure intensifies.

“…[T]he Bank of Israel’s FX intervention of up to $30 billion seems to have done enough to put a floor under the shekel and prevent financial contagion. The BOI is well placed to defend the shekel as it is sitting on large FX reserves equivalent to around $200bn (40% of GDP).”

While the buck rose against the shekel, it weakened slightly against other rivals like the euro. The ICE U.S. Dollar Index
a gauge of the buck’s value against a basket of its main rivals, was off marginally lower on the day at 106.005.

Shares of the iShares MSCI Israel ETF
which holds Israeli stocks, were trading 0.7% lower Monday while U.S. stocks rallied.

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