The Israeli shekel (ILS) has taken a hit against the US dollar following a resurgence of conflict in the Middle East.
The recent conflict escalation has pushed the region dangerously close to a full-scale war. In the aftermath of the October 7 attack, the value of the shekel has plummeted, dropping from 3.85 to the dollar to 3.95, and it has continued to weaken even further, reaching over four shekels per USD.
Shekel's Sharp Decline
The shekel's descent was swift and striking, with the first trading day after the October 7 attack seeing the exchange rate tumble from 3.85 shekels to the dollar to 3.95. Since then, its value has weakened, surpassing the four-shekel mark per USD.
While this 4% decline might not seem dramatic compared to the sharp plunges experienced by the Russian ruble or the Ukrainian hryvnia after the February 2022 war, it is essential to recognize the differences in the scale and nature of these conflicts.
Despite the smaller scale of the current conflict, it remains divisive in the Western world. Beyond a direct impact on tourism, there is concern that this situation might revive boycott movements reminiscent of the early 2000s.
Immediate consequences of the conflict are already evident. Several villages in the north and towns in the south of Israel have been evacuated. Approximately 300,000 reservists have been called up, leaving their regular jobs. These actions come with a vast civilian financial cost.
Moreover, there's the looming military cost. Estimates put it at around 20% of the GDP, approximately $100 billion. This figure naturally depends on the scale and duration of the operation.
The Economic and Military Costs
Beyond the civilian financial cost, there is also a substantial military cost. The scale of this operation and its duration will determine the full extent of the financial burden. Still, preliminary estimates put it at around 20% of Israel's GDP, potentially amounting to $100 billion.
Nevertheless, there has been no official order for an invasion. With President Joe Biden's visit to Tel Aviv, it's unlikely that such an order will be issued in the immediate future.
This uncertainty leaves both the shekel and the region in suspense as financial markets attempt to gauge the potential economic consequences of an invasion and how it might affect the currency's value.
Room for Diplomacy
Israel's stated goal is to eliminate Hamas, but the question arises whether Hamas would be willing to relinquish power and, if so, for what terms? While the likelihood of such a scenario seems low, there is room for diplomacy.
Just as Russia once made unacceptable suggestions regarding NATO, it's essential to question Hamas' terms. It's a risky question in the current climate, but exploring all possible avenues for resolving the conflict is critical. Beyond public rhetoric, there's a need to address the complex issues.
The demographics of Gaza, with a considerable portion of the population being young, underline the importance of seeking a solution. While it may be a long shot, there may be a window of opportunity to reach peaceful terms. The world waits for clarity, and those affected by the conflict deserve to know what path might lead to a resolution.