Shekel Loses Value After Cabinet Decision: Dollar at 3.46 Shekels

SadaNews Economic Translation - The Israeli Cabinet approved a plan to occupy the Gaza Strip last night; the value of the American currency against the shekel rose to its highest level since early June amid fears of a long-term security escalation in Gaza.

The Israeli political and security cabinet's decision to regain full control over the Gaza Strip weakens the value of the shekel against major currencies, as the dollar jumped to 3.46 shekels - its highest level since early June, and the euro rose to 4.01 shekels. Last night, the shekel rose to 3.41 shekels to the dollar - but early this morning, with reports of cabinet approval emerging, the Israeli currency weakened to its current trading levels. As reported by the Hebrew economic newspaper Calcalist, according to SadaNews Economic translation.

The market's reaction comes amid increasing concerns about the long-term security escalation, the large-scale mobilization of reserve soldiers, and the potential consequences on the Israeli economy, including damage to investor confidence and growth forecasts.

On July 7, the Bank of Israel decided to keep the interest rate unchanged at 4.5%. This is the twelfth consecutive decision to maintain the interest rate at this level, amid a state of extreme uncertainty in local and global markets, particularly in light of the repercussions of the fighting in Gaza and other security factors.

In a decision issued a month ago, the bank's research department reduced its growth forecast for 2025 by 0.2% to 3.3%, and raised its forecast for 2026 to 4.6% (compared to 4% in the April forecast). The department estimates that the government budget deficit will reach 4.9% by the end of 2025, thus exceeding the legally allowed deficit cap, despite a 0.7% increase compared to previous forecasts, according to SadaNews translation. The research department expects the interest rate a year from now (in the second quarter of 2026) to be 3.75%, a forecast that mirrors the average forecasts of private sector experts and reflects three interest rate cuts over the next year.

However, these forecasts are based on the assumption that there will be no violent fighting in Gaza by the end of July, which is questionable in light of the cabinet's decision tonight.

Regarding inflation, the consumer price index in Israel rose by 0.6% in July, and the inflation rate over the past twelve months was 3.2%. In June, the index rose by 0.1%, and the inflation rate over the past twelve months (June 2024 compared to the same month in 2023) was 2.9%.