Factors affecting the Israeli shekel exchange rate include the robustness of the Israeli economy, the interest rate set by the Bank of Israel, Israel’s trade deficit and fiscal policy, reports Globes. A slowdown in economic output, increased taxes and a larger trade deficit may lead to a weakening of the shekel. External influences, including geopolitical risks, the strength of other global currencies and the interest rate in other investment-friendly countries may also affect the exchange rate.
A rise in the value of the shekel can the economy by depressing exports, explains the Times of Israel. As goods priced in a strong currency are more expensive than those priced in other currencies, currency appreciation negatively affects exports. The Israeli economy is highly reliant on exports, increasing the potential impact of currency appreciation. Due to its international customer base, Israel’s high-tech sector is especially vulnerable.
The shekel exchange rate is considered an indicator of investors’ views of the Israeli economy, notes the Times of Israel. A weaker shekel indicates lower investor confidence, while the reverse is true for a stronger shekel. Many short-term conflicts, including the second Lebanon War, left little effect on the shekel exchange rate, indicating that investors did not believe those conflicts would significantly damage the Israeli economy.