Eyes on Israel central bank as judicial push keeps shekel tumbling vs...

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Israel's shekel fell 1.5 percent versus the dollar on Wednesday amid a plan to overhaul the country's judiciary, continuing a rapid decline that could prompt central bank intervention.

The shekel stood at 3.68 versus the US currency, its lowest level since March 2020, after weakening 1.6 percent on Tuesday.

Since hitting a high of 3.34 on Jan. 25, the shekel has slid nearly 10 percent on talk of local companies pulling bank accounts from Israel and foreign investors staying away due to the proposed judicial changes.

The reform would give the government greater sway on selecting judges while limiting the Supreme Court's power to strike down legislation.

"The weakening shekel trend will most likely continue as long as no reasonable compromise is reached on the judicial reform," said Jonathan Katz, chief economist at Leader Capital Markets.

He noted that foreign exchange intervention was possible to "smooth out sharp volatility" but was not a tool preferred by the Bank of Israel.

The central bank - which declined to comment - has bought tens of billions of dollars over the past 15 years to prevent the shekel from strengthening too quickly and its forex reserves stand at $201 billion.

"If this (shekel depreciation) continues rapidly, we could see the Bank of Israel hiking rates to 5 percent in the next rate decision (April 3), and possibly earlier," Katz said.

With Israel's annual inflation rate at a more than 14-year high of 5.4 percent in January, policymakers voted to raise the benchmark interest rate (ILINR=ECI) by 50 basis points on Monday to 4.25 percent, its eighth hike in a row. Yet, the move was overshadowed by the judicial change plan that passed its initial vote in parliament on Monday.

Following the vote, Citi said it was going long dollar-shekel, targeting 3.95 to the dollar.

Critics say Prime Minister Benjamin Netanyahu - who is on trial on graft charges that he denies - is seeking legal changes that will hurt Israel's democratic checks and balances, foster corruption and bring diplomatic isolation.

Proponents say the changes are needed to curb what they deem an activist judiciary that overreaches its authority to interfere in politics.

Government bond prices were down as much as 1.9 percent, while the main Tel Aviv-125 share index (.TA125) fell 1.1 percent.