The challenge of a foreign currency
When you were pre-Aliyah and thinking of all the opportunities and changes that your new life in Israel would bring, the chances are you didn’t give too much thought to the exchange rate markets. They certainly wouldn’t have formed part of the practical immediate questions such as what belongings to leave or take, where to move to initially, employment issues, and if kids were in the picture – which schools and ganim were relevant.
However, once settled into your new life in Israel, it’s time to start paying attention to those less urgent issues that often are put on the side. And one of the main decisions that olim postpone is the question of what to do with their assets in their country of origin, and if they have foreign currency income (from investments, salary or pensions) – what to do with the foreign currency?
Assets in Israel vs Abroad
If you have moved or are planning on living in Israel, it is likely that most of your expenses will be spent in shekels over your lifetime, so you need to ensure that a significant portion of your investments are tied to your local currency to avoid high exchange rate risks. Your unique situation will dictate the answer to the difficult question of how much of your assets to invest in shekels as opposed to other currencies. If you anticipate future sources of income in foreign currencies (e.g., inheritances, social security payment, IRAs) then having a large amount of your savings denominated in shekels becomes even more important.
Investment options play a big part in this equation and can influence long term hold positions in one currency or another. But I believe that even if large parts of your portfolio are held abroad, you still need to ensure that you have significant resources available in shekels in order to avoid a situation where you are forced to convert currency immediately at unfavorable rates. With the ever-tightening and restrictive post 9/11 and money laundering regulations, it is becoming increasingly difficult to rely on the ability to move funds quickly should you need them urgently. It is thus crucial that your emergency funds are in the country where you will likely need them.
And whereas this is very true for your day-to-day expenses, it is even more crucial as your retirement approaches. You don’t want to be hostage to large currency fluctuations when you need to start accessing your savings to fund your retirement in Israel.
If you decide to keep your assets in your country of origin, it is vital that you remain aware of the financial developments and changes there. Legislation regarding tax changes and their possible impact on your financial setup must be considered (US President Trump’s recent tax reform being an example.) Make sure that either/both you or/and the financial professional you are working with are assessing the ramifications of all changes, and their potential bearing on your financial situation.
When to convert my foreign currency?
If you decide that you want to move your funds to Israel, you need to ask yourself the following questions:
- when do I bring the money to Israel for conversion?
- do I convert the money at one time or over a period of months or years?
- how do I avoid feeling that I’m never converting at the optimum exchange rate?
Unfortunately, there is no definitive answer to the dilemma of when to convert your foreign currency. I don’t believe that anyone can accurately predict currency movements – especially not the financial press which is continually seeking new headlines. At the time of writing this article, the exchange rate is below 3.4 shekels to the dollar- its lowest rate in more than six years. Does that mean there is a good chance of a correction and you should wait before converting, or should the downward momentum worry you and provide added incentive to convert at the current rate before the dollar weakens more?
Regrettably, there is no one answer that fits all situations. You must look at your individual situation to plan a course of action that works best for you and takes into consideration your unique risk profile. Answer the following questions, and you will probably know whether you should convert the money now or wait.
- When do you need to use the money? The timeframe will likely dictate how much patience you can have to wait for a correction.
- If you convert at the current rate and then the shekels weakens, will you be able to take advantage of a new exchange rate by converting other foreign currency or will you feel that you have completely lost out?
- If the dollar continues to weaken and stays depressed for a long period of time, will it undermine your larger financial plan?
The dollar has traded in a relatively tight band of between NIS 3.5 – 4 to the dollar over the last decade or more. This suggests that the probability is high that the dollar will recover somewhat, however, there is always the risk that this low rate will become the top end of the currency band of movement for the next decade. Mainstream advice suggests that if you don’t need the funds immediately it is worth waiting for a recovery of the dollar before converting large amounts of foreign currency into shekels. Israeli exporters are adversely affected by the shekel currency appreciation, which gives the Bank of Israel definite incentives to increase their purchase of dollars in order to weaken the shekel. But if all your income is dollar based, consider converting some funds even at a lower rate, to protect yourself from a possible further drop.
There’s no getting away from the fact that the whole subject of investments and currency risk as they apply to the multi-national is incredibly complicated and must be handled properly to ensure your long term financial stability. If you aren’t comfortable with exchange rate optimization being your new Aliyah side career, then speak to the relevant professionals. Whereas it may have been okay to ignore these decisions when moving to Israel, there’s too much at stake to ignore them long-term. Behatzlacha!