US dollar dominates Israeli economy

The Israeli economy is closely tied to the US dollar, particularly since the runaway inflation that the country underwent forty years ago that eroded the value of the shekel daily and caused alarmed Israelis to talk about money and prices in dollar terms. In the stabilization program of 1985, a fixed rate was set for the (old) shekel against the dollar in an attempt to gain control over inflation, but even many years after the “fluctuation band” of the shekel against the dollar was abolished, several markets in Israel, but chiefly the real estate market, operated almost solely in dollar terms.

Gradually, as confidence in the Israeli economy rose, dollar linkage died out. Fifteen years ago, for example, the Bank of Israel excitedly reported that by the end of 2007 the proportion of new rental agreements linked to the dollar had fallen to “only” 62%, from 90% in 2005. Within a few years of this, dollar-linked rental agreements almost completely disappeared.

Nevertheless, the Israeli economy remains very dependent on the US currency. First of all, it is an economy largely based on exports. The value of Israel’s exports reached $200 billion in 2022, and almost a quarter of that sum consisted of exports to the US.

Even trade with the rest of the world mainly takes place in US dollars. When transactions are denominated in euros, the exchange rate is not set directly, but via the dollar, that is, first of all conversion from shekels to dollars, and then from dollars to euros – there is no real shekel-euro rate. The recent rises in published shekel-euro exchange rates (or in shekel rates against other currencies) result from depreciation of the dollar against the euro (or the currency in question) and depreciation of the shekel against the dollar.

It is possible to buy foreign currencies other than the dollar at the bank, but these transactions do not take place via the stock exchange and account for only a small proportion of the foreign exchange market.

Almost 8% of Israel’s exports, some $15 billion worth, go to China. Imports from China amount to about $44 billion annually (13% of total imports in 2022). It’s too early to tell how Israel might respond to a future demand that this trade should take place in a currency other than US dollars or euros, and whether we shall see trading in the shekel against the yuan any time soon.

Trading takes place in Israel in dollars as such, and not just in products priced in foreign currency. According to the Bank of Israel, net purchases of foreign currency by financial institutions (insurance companies, pension funds, etc.) amounted to $22 billion last year. On the other hand, non-financial companies made net sales of foreign currency last year, selling dollars as the shekel weakened, to the tune of a net $9 billion.

The Bank of Israel mainly holds its foreign exchange reserves in dollars. At the end of March 2023, it held over $200 billion in foreign exchange reserves, which compares with $115 billion in April 2018. The foreign exchange reserves are mainly held in case of crises, when the Israeli government might find it hard to obtain external finance in an emergency, or in order to stabilize the foreign exchange markets in exceptional circumstances.

At the end of 2022, the distribution of the Bank of Israel’s foreign exchange reserves was: 61% US dollar, 20% euros, 5% pound sterling, 5% Japanese yen, 3.5% Australian dollars, 3.5% Canadian dollars, and 2% Chinese yuan.

Published by Globes, Israel business news – en.globes.co.il – on April 23, 2023.

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