“The very strong shekel reflects macroeconomic conditions”

Israel’s foreign exchange market is volatile. The shekel, which broke a 30-year record against the US dollar last week, has since weakened slightly, but is still trading at 1990s levels. Overall, the Israeli currency has strengthened by more than 13% in the past year. This appreciation brings with it positive developments, mainly in terms of easing the cost of living and a decline in the inflation rate, which was cut to a four-and-a-half-year low in January. On the other hand, investors exposed to foreign exchange, as well as exporters, are being harmed by the sharp appreciation.

There are several reasons for this move, both local and global. On the domestic side, there is the reduction in exposure of institutional entities to foreign currency and a series of impressive exits in Israel’s tech industry. At the same time, the US dollar has weakened globally against other currencies. The dollar index (DXY), which measures the strength of the US currency against the currencies of its main trading partners, has fallen by about 10% in the past year.

The connection between the shekel and the S&P 500

To understand the broader implications of the strong shekel on the Israeli economy, we spoke with Prof. Zvi Eckstein, former Deputy Governor of the Bank of Israel and currently head of the Aaron Institute for Economic Policy at Reichman University.

Why do you think we have reached a situation where the dollar is so weak against the shekel?

“We have actually been in a balance of payments surplus since 2004, which stands at 3-4% of GDP. What balances this surplus is, among other things, investments by Israeli companies, but mainly investments by households through their pension accounts: institutional, advanced training funds, current savings and assets abroad.

“The most significant component is that since 2008, the size of pension savings has reached about 17% of wages in the economy, which is about 10% of GDP. Households and investment managers spread these investments very widely abroad.”

But in recent months, the appreciation of the shekel has gained momentum

“In the past two months, we have seen two phenomena that are strengthening the shekel. The first is that the dollar itself has weakened globally for various reasons. The second is the forecast of most households and investors in Israel that the US markets are too expensive. We see the problem of the AI bubble, and therefore they prefer to invest more in Israeli assets.”

Eckstein adds and explains that this is a kind of self-feeding cycle: “There is another equilibrium here. The strengthening of the shekel in itself creates an expectation that it will continue to strengthen. This means that investments abroad are moderating, and if they are already investing abroad, they do so using hedging. Hedging is actually buying shekels, and this also contributes to the further strengthening of the shekel. All of these factors together create a very strong shekel, and this is consistent with the macroeconomic conditions that we are currently seeing in the Israeli economy, and therefore the Bank of Israel is not intervening.”

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Is there a chance that we will reach a dollar with a prefix of 2 against the shekel?

“It is difficult for me to give a forecast about the behavior of investors in the economy, but certainly if the S&P 500 and if other indices abroad continue as they are now, then we will continue to see investments abroad moderating and thus the shekel strengthening.”

What will cause a change of approach?

When it comes to intervening in the foreign exchange market, the Bank of Israel has two main ways to do so. Through a direct channel of buying and selling dollars, or through changes in interest rates. On Monday, the Bank of Israel will announce its interest rate decision after two consecutive cuts, and the market is wondering whether it will do so again.

When will the Bank of Israel have to intervene?

“First, the strengthening of the shekel requires the Bank of Israel to re-examine the interest rate. In my opinion, there is a high probability that in the upcoming decision they will choose to lower the interest rate.

“The forecast for the coming year shows that inflation will remain below 2%, and the strengthening of the shekel even increases the chance that it will be lower than that. Therefore, there is a possibility of lowering the interest rate – a step that is expected to moderate investors’ desire to hold the shekel, at least for short-term liquid funds. Those investors may prefer assets that assume higher interest rates, such as in the US, and thus curb the strengthening of the shekel to some extent.

“If the value of the dollar drops significantly, it could significantly harm the tech industry, and it’s possible that the Bank of Israel will intervene, but the probability of that happening is low. Only if the Bank of Israel feels it’s ‘overkill.'”

The less positive statistic about the economy

Could an US attack on Iran change the market picture?

“We saw that the IDF’s success last June caused investors to lower Israel’s risk index and increase investments. If Iran, for its part, sends precision missiles at Tel Aviv, for example, I expect that some investors will change their assessments, including investors from abroad. In such a situation, we may see some weakening of the shekel again.”

In terms of the Israeli economy since October 7, what are your conclusions?

“I was mainly surprised that the war with Hezbollah, Syria and also what happened in Iran exacted low economic prices compared with what we thought it would be. The war in Gaza was indeed expensive, but in the north the costs were low compared with the estimates. We have to remember that this did not harm Israeli high-tech. On the other hand, we saw a large increase in the defense industry and exports.”

But there is one point that Eckstein indicates where the damage is evident. “The Israeli economy experienced average growth of 2% in the two years of the war, which is essentially zero in terms of GDP per capita. In other words, there was damage to the economy, even in the long term. And that with enormous defense spending.

“If we were to deduct the extraordinary defense spending from the increase in GDP, we would discover that the economy is actually experiencing negative growth of about 1% to 1.5%. The pleasant surprise is that the campaign in the north and in Iran was effective and relatively cheap for the economy, and that Israeli high-tech – the ‘aircraft carrier’ of the economy – succeeded in these two years with a strengthening in GDP and productivity.”

Published by Globes, Israel business news – en.globes.co.il – on February 19, 2026.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.