(Bloomberg) -- Israel’s central bank has resorted to unprecedented measures to contain the most intense volatility faced by the shekel in two decades but couldn’t prevent its steep slide after an attack by Hamas militants led the government to declare war.

In a statement minutes before trading was set to begin on Monday, policymakers said they’d sell as much as $30 billion of reserves to support the currency and extend up to $15 billion through swap mechanisms. While the shekel slumped to its weakest since 2016 and a gauge of expected swings rose sharply, the Bank of Israel signaled confidence in its efforts so far, saying an emergency interest-rate hike isn’t currently on the table.

“The scheme is too big for speculators to test us,” Golan Benita, head of the central bank’s markets division, told reporters.

Still, Israel’s currency slid to a session low despite the intervention, after briefly erasing losses when it was announced. The currency was the world’s worst performer on Monday, down 2.7% to 3.9506 against the dollar as of 4 p.m. in New York.

The stare-down with markets followed the deadliest attack on Israel in decades, with hundreds killed on Saturday and Prime Minister Benjamin Netanyahu saying the fight against Hamas in the Gaza Strip will be both lengthy and difficult. The extraordinary intervention by the central bank marked the first time it’s selling foreign exchange to prop up the shekel since it was allowed to trade freely. 

The market verdict isn’t yet clear even as the fallout of the conflict reverberated across asset classes. 

Yields on the government’s 10-year shekel bond climbed 23 basis points to 4.5%, the highest since 2012. The price of Israel’s 100-year debt due in the year 2120 fell to 65.2 cents on the dollar, the lowest since since it was sold in 2020.

The cost to insure the nation’s debt against default jumped 25 basis points to 84, the most since 2009. Options traders see about a 70% probability that the shekel might weaken to 4 per dollar in a month — a level unseen since 2015 — compared with only an 18% chance the day before the attacks.

Stock markets across the Middle East also fell amid concerns the war might escalate into a broader conflict. Israel’s benchmark TA-35 stock index plunged 6.5% on Sunday but recovered some losses. It rose 0.9% on Monday after losing as much as 1.3% earlier in the day. 

‘Maintaining Stability’

“In circumstances like this, maintaining stability is more important than levels,” said Geoffrey Yu, a currency and macro strategist at BNY Mellon in London. “In the short term, there will be some volatility in markets, but we expect this to be manageable. The liquidity support is expected and the Bank of Israel is very much experienced in such matters.”

Read more: Israel 2120 ‘Century Bond’ Drops to Record Low

The central bank is dusting off a crisis-era playbook in steering the $520 billion economy while also leaving room for maneuver during a national security emergency that could last for months.

The goal is to smooth out volatility in the shekel’s exchange rate and provide the necessary liquidity to support markets, according to the Bank of Israel.

Benita said it’s not defending any specific shekel level and currently has no plans to expand its support program, declining to comment on the interventions carried out on Monday. 

Policymakers previously resisted supporting the shekel even as investor concerns surrounding the government’s controversial efforts to weaken the power of the judiciary weighed on the currency for months. The shekel is one of the biggest losers this year among a basket of 31 major currencies tracked by Bloomberg.

A program of currency interventions begun more than a decade ago by then-Governor Stanley Fischer to stem the surging shekel helped the central bank amass reserves that now surpass a third of gross domestic product. They stood at nearly $199 billion at the end of September. 

The consensus among strategists and economists so far suggests confidence in the shekel even as it’s emerged vulnerable from months of political upheaval. 

Citigroup Inc. doesn’t “expect further sustained bouts” of the currency’s weakness, while HSBC Holdings Plc said the “shekel is likely to stabilize.”

Besides the possibility of rate hikes and expanding the scope of its existing program of interventions, the central bank could also opt to conduct bond purchases, a measure it used to support markets at the height of the global pandemic.

“This is clearly an extraordinary time for Israel and the central bank is likely to want to minimise the economic costs of the conflict as well as dampen any financial stability risks,” Deutsche Bank AG strategists led by Christian Wietoska said in a note.

--With assistance from Colleen Goko and Kerim Karakaya.

©2023 Bloomberg L.P.