By Maayan Lubell
JERUSALEM (Reuters) - Israel's shekel dropped to its lowest level in more than three years on Thursday amid concerns that a judicial crisis besetting the country was deepening, with compromise efforts stalled and a key Supreme Court hearing days away.
Reaching 3.84 against a strengthening dollar, the shekel was at its lowest since March 2020, when it slumped relatively briefly at the start of the coronavirus pandemic in Israel.
At the Sept. 12 Supreme Court hearing, the entire 15-judge bench will hear an appeal for the first time in Israeli history, against a judicial amendment that curbs some of its own powers,
passed by Prime Minister Benjamin Netanyahu's coalition in July.
There had been hope this week that President Isaac Herzog may forge a compromise between Netanyahu and his political rivals over the premier's contested plan, but his efforts appear to have failed.
"With a lack of agreements and the court hearing approaching during a month of legal proceedings, the markets are concerned about a constitutional crisis," said Chief Markets Economist at United Mizrahi Tefahot Bank, Ronen Menachem.
Netanyahu, who says the changes are meant to balance a Supreme Court that has become too interventionist, has been hazy when asked whether he would abide by a ruling that would quash the new law.
His nationalist-religious coalition in January launched its campaign to overhaul the justice system, sparking unprecedented protests and sending the shekel down around 10% as Western allies voiced concern for the health of Israel's democracy.
"Over the past year the shekel was one of the weakest currencies among the comparison currencies, while only the Russian rouble and the Turkish lira demonstrated weaker performances," Bank Leumi said in its weekly report.
Affected by the political developments, the shekel's short-term performance will be difficult to predict, Leumi said.
Should a judicial compromise be reached it could go up, said Menachem. The Bank of Israel has cautioned that further weakening could push up inflation and warrant more rate hikes.
A source in Netanyahu's coalition said that if compromises are not reached, the government "within days or weeks" might still present a scaled back version of the original plan.
(Additional reporting by Steve Scheer in Tel Aviv; Editing by Ari Rabinovitch and John Stonestreet)