Weakening Israeli New Shekel Raises Concerns amidst Conflict with Hamas

The Israeli new shekel has reached its lowest point against the U.S. dollar in over eight years, fueling worries among investors about the potential economic repercussions of an extended confrontation with Hamas.

Testing New Lows

Based on FactSet data, the shekel (USDILS, +0.94%) traded as weak as 4.006 against the dollar on Monday. This marks the first time since March 20, 2015, that it has crossed the 4-to-1 ratio. At that time, it reached a rate of 4.057 as the U.S. dollar initiated a widespread rally that ultimately brought it close to achieving parity with the euro.

Economy at Risk

The latest decline in the shekel can be attributed to concerns surrounding Israel's economy and the immense mobilization required for the ongoing conflict. Furthermore, apprehensions over the potential for a broader war that may involve other nations such as Iran have exacerbated investor worries.

According to Matt Gertken, the chief geopolitical strategist for Montreal-based BCA Research, there is a greater than 50% chance that militant groups from Lebanon or Syria could be drawn into the war or that a direct conflict with Iran could ensue.

Related: Possibility of Israel-Hamas War Expanding Beyond Gaza Threatens Oil Market

While Israel's central bank possesses ample resources to support the shekel, an extended period of conflict could strain both the Israeli economy and labor market, as expressed by economists from Capital Economics.

Israel's Economy Remains Resilient Amidst Conflict

Israeli economy has consistently demonstrated its resilience to conflicts in the past, effectively adapting over time to limit direct impact on its overall economic status. However, should a larger and more prolonged war ensue, experts warn of potential spillover effects on the labor market and economy. Nicholas Farr, an emerging Europe economist at Capital Economics, emphasizes the significance of this concern.

Bank of Israel's Foreign Reserves Provide Cushion

With $200 billion in foreign reserves at its disposal, the Bank of Israel is well-positioned to effectively support the shekel if selling pressure intensifies. The sizable reserves allow the Bank of Israel to confidently intervene within the foreign exchange market to maintain stability and prevent financial contagion. In fact, their previous foreign exchange intervention of up to $30 billion has already proven successful in establishing a solid foundation for the shekel.

Buck Strengthens Against Shekel but Softens Against Other Currencies

While the US dollar experiences a rise against the shekel, it demonstrates a slight weakening against rivals such as the euro. The ICE US Dollar Index DXY, which gauges the dollar's value against a basket of main currencies, experienced a marginal decrease, resting at 106.005.

iShares MSCI Israel ETF EIS Experiences Minor Decline

As Israeli stocks remain under the spotlight, the iShares MSCI Israel ETF EIS encounters a slight decrease of 0.7% in trading on Monday. Conversely, US stocks rally amidst these fluctuations.