If I had a Shekel (or a cheap Dollar) every time someone asked me the following question: “What do you say, is now a good time to buy Dollars, while the rate (against the Shekel) is low?”
I have been making a living from economic consulting for four decades, and to be honest, this is the easiest question to answer. I always say “no,” and I am usually right. For 25 years, the Shekel has been trending stronger against the Dollar, even if it “pauses to refresh” from time to time. For all those who asked me when the rate was 4.4 Shekels to the Dollar if it was time to buy, I said no—and they returned and asked again at 4.0 (what, it’s so low now?). Some continued to ask at 3.9, and 3.6, and then—at 3.3—it was “impossible,” and here we are, under 3 Shekels to the Dollar.
And my answer today remains the same. No.
Everyone is trying to find a bottom, or some minimal threshold below which “the Dollar (against the Shekel) cannot possibly continue to fall.” A number below which the end will come: the Bank of Israel will intervene, the government, Trump, someone. But the truth is, there is no such number. At least not in the current system of rules in Israel.
A bit of history—there really was such a number once. A moving number. It was called the “Diagonal Band,” or by its nickname, “The Band.” It was a mechanism for pegging the Shekel to a basket of major world currencies, led by the US Dollar. The idea behind the Band was that the Shekel could not weaken too much or strengthen too much, in order to maintain economic and market stability. It was born after Israel suffered a very difficult economic decade, starting with the 1973 Yom Kippur War and ending with hyperinflation in the 1980s.
As part of the realization that Israel could not continue to fix its currency rate against foreign currencies—which created an official exchange rate and a “black market” for currency conversion based on market forces—it decided to create room for maneuvering. On one hand, it would leave the state in control, and on the other, it would allow for real foreign currency trading and bring the Israeli economy closer to Western standards.
This Band was born in 1989 and lived, with certain changes, until 2005, when it breathed its last. After years of the Shekel trading close to its lower limit—meaning it maintained its strength against all currencies it was traded against, without being able to realize its potential for appreciation because every time it touched the lower limit, the Bank of Israel had to intervene and weaken it to keep it within the band.
Ah, how fun it was back then. As a young trader (relatively speaking), that Band provided me with a good living in those years. Every time the Shekel approached the lower limit, I could bet on its weakening, because the Bank of Israel—by law—was behind me, and had to sell Shekels to bring the rate up a bit. In any case, what was, was—but that was when I realized the power of a currency, or rather, the power of a free market. If there is no central bank in the way, the currency will reflect the economy. And sometimes even if there is a central bank in the middle, it is not enough. Ask the British what George Soros did to them in 1992. But that is a different story.
In any case, since 2005, the movement of the Shekel against other currencies has been completely free, and therefore, the Israeli economy determines the direction and rates over time—simply because it is the only variable that affects the Shekel. After all, nowhere else in the world does two terminal traders meet and do business in Shekels. To put it simply—if the Israeli economy is more successful, relatively, than the global economy, or more accurately—if it advances and develops at a faster pace than the rest of the world—then its currency will also strengthen relatively against other currencies, compared to its starting point in 2005.
And that is exactly what is happening.
Let’s go back to 2002. A global high-tech crisis, a security crisis in Israel, high unemployment, high interest rates, the Shekel worth 5 Shekels to the Dollar (the highest official rate ever was 4.994. During that day, the Shekel even traded for a moment above 5 Shekels to the Dollar). In fact, from that moment on, a trend of Shekel strengthening began, reaching a rate of 3 Shekels to the Dollar. Or in plain language—Shekel holders are “buying” the world cheaper. For a product that costs 100 Dollars in the US, they only need 300 Shekels, compared to the 500 Shekels they needed 25 years ago.
How can that be? Has the Israeli economy really succeeded that much? Yes.
As usual, simple explanations without blowing your mind with exhausting numbers:
Demographics—perhaps the strongest explanation, and with the most long-term impact. While almost the entire West is shrinking—meaning more people are dying than being born—in Israel, the situation is the opposite. The economic mathematics are simple: fewer citizens also mean less production, less consumption, less exports—less of everything. And if you are a country with less, your currency is also worth less. Israel consistently increases the gap compared to the West (and the truth is, also compared to most of the East) in birth rates, and its population has almost doubled in the last 30 years. And according to the data, this situation is not going to change tomorrow morning.
Gas and Oil—Israel has entered a field in recent decades that was foreign to it since its establishment, and today it is a tiny energy powerhouse—providing for itself and selling gas and oil to its neighbors. These funds, which literally come out of the ground, out of thin air, enter the country as Dollars and a large portion of them is converted into Shekels and invested in various investments. In other words—the land creates excess demand for Shekels, beyond the production of the local economy. Anyone who wants to check will find a certain correlation between the entry of these funds and the strengthening of the Shekel in the last decade.
High-Tech—here there are three parts. The first part is the knowledge industry. Israel has trained professionals over the years who have excelled in technological developments and thus has effectively sold technological knowledge to the world, which brought Dollars into the country—which must be converted to pay salaries in Shekels, and it has also, of course, sold products based on that knowledge. The second part is that this knowledge also attracted foreign companies (led by Intel about 30 years ago, and many good companies since) to establish development centers in Israel, which in turn attract huge budgets from these companies, entering Israel and strengthening the Shekel. And the third part is, of course, the stocks of those Israeli companies that are being created, when smart venture capital seeks to invest in them. These funds also mostly enter Israel, are converted into Shekels, and from there to the pockets of the shareholders who created them. Of course, these companies produce more knowledge, and this knowledge in turn produces additional new companies. In short, this is growing over the years and strengthening the currency significantly.
Local Economy—Israel, which was established in 1948 as a country with a socialist economy, moved over the years toward the economic right, toward the free and entrepreneurial market. This movement allowed for the exploitation of the economic growth potential of the growing population (demographics, remember?). In simple language—more production, more consumption, higher wages, improvement in quality of life, sustainable economic growth over time. All the ingredients that strengthen a local currency, even without the advantages of the previous items.
What do we have? An economic system that uses its most prominent relative advantage—when you are small relative to the total pie, it is much easier to take bites that don’t really affect its size but make you very full. Or simply—Israel has managed to find a way to export knowledge, resources, and stocks, and consistently attract foreign currency that buys all this good stuff. Mostly through the Dollar.
And where have we arrived—to the eternal question I am asked every week—so tell me, is now a good time to buy Dollars?
You already understand why I answer “no” every time?
So actually? What is the bottom? Where is all this going?
The answer is—I don’t know, and to the same place, as long as the conditions remain.
Meaning—if Israel doesn’t re-legislate the Band, or any other technical solution to control the exchange rate, and as long as Israel continues to export to the world the knowledge, resources, and investments it wants, and as long as the possibility of managing a free economy is preserved in Israel, and as long as the Bank of Israel continues to behave as an independent body that makes decisions based on professional parameters—then most likely interest rates will remain low, growth will remain high, production and exports will grow with the growing population, and if all this happens—do not look for a bottom for the Dollar against the Shekel, because there won’t be one.
And if the State of Israel decides to change the rules? To stop free currency trading, to carry out a government takeover of the Bank of Israel, to raise taxes on foreign investments, or anything else extreme? What will happen then?
And to that I say—friends, this is the risk in the equation. Whoever lives in Shekels lives with the risk. And until now, it has succeeded quite well...
I absolutely remember the promise from last week to review the subject of real estate, and its turn will indeed come—in next week’s review. See you there, or during the week—if I can’t help myself until then...