The foreign banks' warnings began to come true on Tuesday, with the US dollar's value went up 2% against the shekel to 3.64 in light of investors' concerns over the consequences of the judicial reform in the Israeli government. This has been the sharpest increase since last September and the biggest fluctuation that occurred compared to all other leading currencies worldwide.

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Obviously, the shekel has been weakened compared to all other currencies – 2% compared to the Euro and 2.7% to the Pound Sterling. Foreign exchange market traders said that the second the dollar reached 3.60 and passed this threshold, many stop-loss orders were triggered (closing positions at a loss), and from there, the path to 3.64 was a short one.

What caused the dollar's increase was the Knesset's passing the first reading of the judicial reform package in the plenum and Foreign Minister Eli Cohen's tweet that made its way to Bloomberg's headlines, being interpreted by foreign bodies as possible interference with the Bank of Israel's independence. The tweet was not unusual considering the times, but its timing, paired with the Knesset's provisional passage of the judicial reform, was the spark that set fire to the foreign exchange market.

Although it is only the first reading, and there is still a long way to approve all the reform bills, it is clear that the stock market, especially foreign investors, does not like the fact that there is no widespread consensus regarding the reform. The warnings voiced daily by many senior economists, international organizations, senior officials in the hi-tech industry, and, of course, the non-stop demonstrations, do not contribute to calming the situation, instead only causing alarm.

The abnormal volatility in the foreign exchange market and the sharp increase in 10-year bond yields are likely a promo for what will occur in the future. Even today, Citigroup strategists told Bloomberg that the shekel's value is expected to depreciate by another 8%, and its new target is 3.95. "Despite the 0.5% increase of the Bank of Israel's interest rates, the shekel continues to remain under pressure by local political noise," the strategists said. "It seems that the political situation will become more volatile in the coming weeks when the judicial reforms will be presented for a second reading in the plenum."

Even Peter Kisler, a manager at the "Trium Capital" hedge fund in London, said to Bloomberg in the same article, "It's the judicial reform continuing to weigh on the market. The magnitude of the currency's move has been quite large, but it can still weaken further."

When articles such as this are published in one of the biggest financial portals in the world, which is hard to blame for being left-wing or purposely wanting to harm Israel's economy, it affects the stock market. Foreign exchange traders in foreign banks read the warnings of objective senior officials and understand their message. They have no particular sentiments towards Israel, and if they are convinced that the NIS will weaken, they will continue to increase their shorts on it – like a snowball.

Suppose the USD's value continues to become stronger sharply. In that case, the consequences of the NIS's sharp devaluation are likely to be detrimental to the economy – it will first and foremost likely increase inflation in Israel that refuses to go down in the meantime, which will cause the Governor of the Bank of Israel to increase the interest rate more sharply. While the Bank of Israel has admirable foreign exchange balances amounting to over 200 billion dollars and can intervene in the foreign exchange market and sell USD, its influence is likely negligible compared to the vast amount of buyers.

Finance Minister Bezalel Smotrich's attempts today to calm the situation by making statements to the press, saying that he is not worried about the economy, will apparently not be helpful. Even Prime Minister Benjamin Netanyahu's tweet in which he said that the Bank of Israel's independence would not be violated cannot really help here. If the government stops the legislation and changes the reform so that all parties will accept it, things may return to normal. Israel's economy is strong, and in the meantime, we have seen merely a promo of what is likely to happen later in the future.

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The Bank of Israel purchased tens of millions of dollars Tuesday to stem the rise of the New Israeli Shekel after earlier in the day the US Dollar hit a 25 year low against the shekel, officially dropping below the benchmark 3.10 NIS to 1 dollar rate, a threshold the bank had hoped to avoid crossing.

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The Euro also dropped sharply against the New Israeli Shekel and was traded on Tuesday at an exchange rate of NIS 3.511 to 1 euro.

At the end of official trading, the Bank of Israel set the Dollar to NIS exchange rate at $1 to 3.09 NIS. The dollar lost -0.387% of its value in total against the NIS on Tuesday.

A strong NIS is good for Israeli consumers and tourists. It makes traveling abroad cheaper because the NIS increases in value in relation to local currencies. And since airfares and hotel rates are set in either Dollars or Euros, for the most part, when the NIS rises, it costs Israelis less to buy the same item. This also makes foreign imports less expensive for the Israeli consumer.

There is a downside to Israel's economy, however. The strong NIS means foreign investors in Israeli startups get less value for their money. It also means less spending by foreign tourists since their dollars and euros do not go as far. And it also makes Israeli exports more expensive to foreign buyers.

This is not just a problem of a weak US Dollar due to America's fiscal and financial policies vis-à-vis debt and government spending as a percentage of GDP. All of the world's major convertible currencies were down against the NIS.

The British Pound fell -0.247% on Tuesday and finished trading at a rate of NIS 4.1564 to the pound.

As reported by Israel Hayom on Tuesday, in the coming days, Finance Minister Avigdor Lieberman is expected to declare a series of steps to encourage exporters and compensate them over the strengthening NIS. Over the past year, the NIS has strengthened by over 10% against the US Dollar.

BOI Governor Prof. Amir Yaron views the rising inflation in the world as temporary, said: "The market picture is completely different now, and the strengthening NIS could somewhat curb global inflation."

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Since the last rate decision on July 8, data showed annual inflation dropping to 0.8% in June from 1.5% in May. That is below the government's 1%-3% annual inflation target and a rate of 2% the central bank is seeking to reach.

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Yaron noted that major central banks look to return to expansionary measures, particularly the US Federal Reserve which has had "a significant impact" on the shekel's exchange rate and which is also expected to influence inflation.

"In light of these developments, I estimate that for an extended period of time there will be no decision to raise interest rates," Yaron said in a statement on Wednesday.

"Moreover, if necessary, we have more tools available," he said in a likely reference to intervention in the foreign exchange market.

The Fed was expected to cut interest rates on Wednesday for the first time in a decade.

Four out of five Bank of Israel monetary policy members voted for no rate change this month on a view that the inflation environment had been stable for several months within the target range while there was high uncertainty regarding economic developments in Israel and abroad.

But according to the meeting, MPC members agreed that in the coming months "conditions could ripen for increasing the interest rate by 0.25 percentage points" contingent on the inflation environment and domestic and foreign economic developments.

One member voted for a quarter-point hike.

Following the rate decision, Yaron said it might be necessary to raise rates in one of the upcoming meetings, stressing that while developments abroad influenced Israel, "we do not need to be one-on-one to what is happening in the big blocs."

His comments helped to strengthen the shekel, which has gained 2% versus the dollar this month and nearly 7% in 2019.

After Yaron's latest comments, the shekel weakened 0.2% to 3.5 per dollar, a 16-month peak, from a session high of 3.47 earlier in the day.

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