The Israeli shekel has depreciated by 3% against the US dollar, reaching a level of 3.96 shekels per US$1. This marks its lowest point in the past 8 years. The currency’s decline coincides with the eruption of conflict in Gaza, where the Israeli military and Hamas have engaged in mutual attacks, resulting in over 1,100 casualties.
As reported by RT.com on Tuesday, October 10, 2023, Israel’s benchmark stock index, TA-35, also experienced a decline of 0.3% on Monday, following a significant 6.5% drop the previous Sunday.
Stock markets across the Middle East have also weakened due to concerns about the escalation of the conflict. Dubai’s benchmark index dropped by 2.8%, Egypt’s EGX 30 index saw a 0.6% decline, and Saudi Arabia’s Tadawul All Share Index fell by 0.55%.
On Saturday, the Palestinian armed group Hamas launched thousands of rockets into Israel and deployed militants to infiltrate Jewish settlements near the Gaza border. Meanwhile, Israeli security forces initiated “Operation Iron Sword.” This conflict has resulted in the loss of many lives among both Israelis and Palestinians.
The Bank of Israel
The Bank of Israel has announced plans to sell up to US$30 billion and expand by an additional US$15 billion through swap mechanisms. The sale of foreign currency marks the first step aimed at supporting the shekel since regulators allowed the domestic currency to be traded freely.
In a statement released on Monday, the bank stated, “The bank will operate in the market in the coming period to reduce shekel exchange rate volatility and provide the necessary liquidity for the market to continue to function properly.”
The Impact of Conflict on Currency and Markets
The ongoing conflict in Gaza and the broader Middle East region has had significant repercussions on financial markets, particularly on the Israeli shekel and stock indices. Several key factors contribute to this situation:
- Currency Depreciation: The Israeli shekel’s 3% depreciation against the US dollar reflects the heightened uncertainty and risk associated with the conflict. Investors tend to seek safer assets, such as the US dollar, during times of geopolitical turmoil.
- Stock Market Volatility: Israel’s benchmark stock index, TA-35, has experienced volatility, with declines observed over multiple trading sessions. This volatility is partly driven by concerns over the conflict’s impact on the Israeli economy, as well as broader regional instability.
- Regional Market Effects: Other stock markets in the Middle East have also faced declines, as regional instability can have a contagion effect, spreading concerns and risk aversion across markets. Investors are wary of potential disruptions to trade and regional stability.
- Central Bank Intervention: The Bank of Israel’s decision to sell foreign currency is a common intervention strategy used by central banks to stabilize their currency during times of stress. By injecting liquidity and reducing volatility, central banks aim to maintain financial market functionality.
- Market Sentiment: Geopolitical events, especially those involving armed conflict, tend to influence market sentiment significantly. Traders and investors closely monitor developments, adjusting their positions based on perceived risks and opportunities.
- Humanitarian Concerns: Beyond financial impacts, the ongoing conflict has raised humanitarian concerns, as civilian casualties mount. International pressure and diplomatic efforts may also influence market dynamics.
Central Bank Response and Economic Impact
The Bank of Israel’s commitment to selling foreign currency and providing liquidity is a proactive response to the situation. Central banks play a crucial role in maintaining financial stability during crises, and their actions can help mitigate market disruptions.
The economic impact of the conflict on Israel and the broader region remains a concern. Disruptions to trade, infrastructure, and daily life can have far-reaching consequences. Additionally, the loss of human lives and the suffering of communities are of paramount importance.
Efforts to address the conflict through diplomatic means and reach a peaceful resolution are essential not only for regional stability but also for economic recovery and prosperity. Financial markets will likely continue to react to developments on the ground, making it crucial to monitor the situation closely for both economic and humanitarian reasons.
In conclusion, the conflict in Gaza has had immediate effects on financial markets, including the depreciation of the Israeli shekel and declines in stock indices. Central bank interventions aim to stabilize the currency and mitigate market volatility. However, the broader economic impact and humanitarian concerns underscore the importance of seeking peaceful resolutions to conflicts in the region.