Israel’s currency plunged to a nearly eight-year low two days after a surprise attack by Hamas left hundreds dead, rattling financial markets.
The Shekel weakened about 3% early Monday to near 3.96 per dollar.
Islamist group Hamas killed 700 in Israel and abducted at least a hundred as its fighters attacked Israeli towns on Saturday. Some of those killed were foreigners.
Israel responded with air strikes that killed over 300.
The Bank of Israel announced it would sell up to $30 billion in foreign reserves to defend the Shekel.
“The Bank will operate in the market during the coming period in order to moderate volatility in the shekel exchange rate and to provide the necessary liquidity for the continued proper functioning of the markets,” Israel’s central bank said in a statement Monday.
In addition, the bank said it would provide dollar liquidity to the market through SWAP arrangement of as much as $15 billion, making the entire programme worth $45 billion.
SWAP mechanisms are a form of future contracts through which two parties exchange the cash flows or liabilities from two different financial instruments.
“The Bank of Israel will continue monitoring developments, tracking all the markets, and acting with the tools available to it as necessary,” the central bank said.
The move comes with the shekel already losing ground, weakening almost 10% since the start of 2023.
The depreciation of the currency has contributed to an increased pace of inflation, as a weaker currency makes imports of goods more expensive.
– Not the entire amount
The Bank of Israel last intervened in the foreign exchange market 2021, when it bought billions of dollars to halt shekel’s gain against the U.S. dollar. This time, it is doing the reverse to maintain balance.
“This is a plan and it doesn’t mean that the central bank will use the full amount of the program,” IBI Investment House Ltd. chief economist Rafi Gozlan told The Times of Israel.
“If previously the central bank intervened in the market to stem appreciation of the shekel and stabilize the exchange rate, the current program was announced to supply dollar liquidity to local institutional investors and lenders, should it be necessary,” Gozlan said.
“We are going to see a weaker shekel due to the war situation and the central bank program is intended to prevent high volatility of the shekel exchange rate and support the functioning of the financial market,” said Gozlan.
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