The shekel continues to strengthen today against the US dollar and is currently trading 1.20% lower at NIS 2.9030/$, its strongest level since October 1993. The shekel has appreciated by more than 8% against the dollar since the start of 2026 and is also strengthened against other major currencies. It is currently trading down 0.77% at below NIS 3.42/€, its strongest against the euro for four years.
Industrialists are calling on the Bank of Israel to cut interest rates, but the central bank has meagre tools to deal with the appreciation, which actually benefits the economy and curbs inflation.
Data published by the Bank of Israel this week illustrate the extent to which Israeli institutional investors continue to disengage from the dollar. In the first quarter, pension funds, insurance companies and provident funds sold foreign exchange worth $5.2 billion (in addition to the $13.2 billion they sold in the previous quarter). There were also buyers for these dollars, with foreign residents increasing their purchases of foreign exchange to $6.6 billion, compared with about $1.8 billion in the previous quarter.
The impact on the shekel
Institutional investors are major players in influencing the exchange rate, because they manage huge sums of money worth hundreds of billions of shekels. To this are added other influences such as the strength of the dollar against the basket of currencies, the policy of the US Federal Reserve, the performance of the stock market in Israel and markets around the world, and also the activity in the Israeli economy.
Since October 7, 2023, another central and influential consideration has been added – Israel’s risk premium. In his lecture last week at the Aharon Institute conference, Bank of Israel Governor Prof. Amir Yaron showed the close connection from the outbreak of the war in 2023 until recent weeks between the risk premium (5-year CDS) and the exchange rate of the shekel against the dollar. The correlation is clear. At the outbreak of the war the risk premium increased dramatically, and accordingly the shekel weakened against the dollar. The pager operation in Lebanon led to a dramatic decrease in the risk premium and a strengthening of the shekel, as also happened after the Iran war last June, after the ceasefire in Gaza and again now with the Iran campaign ceasefire.
Each of these factors individually affects the strengthening of the shekel, but sometimes they are also intertwined. So when the risk premium changes, it affects the exchange rate and the stock market and accordingly forces institutional investors to change strategy or hedge their investments – in a way that encourages the appreciation or depreciation trend.
Meitav chief economist Alex Zabezhinsky says, “Institutional investors are also reducing dollar exposure due to increases in markets abroad – they technically have to sell dollars if they want to remain with a fixed exposure. But they are also actively reducing exposure due to the strengthening of the shekel and the increases in the local market.”
At the same time, he also points to a mystery – and that is the behavior of the foreign residents who actually purchased dollars in Israel. “This is a change because we don’t know what is behind it. Are these financial or real investors? Is this a technical transaction, or is it important in the long term, because they see that the shekel has strengthened too much, or because they are afraid of Israel? In any case, their impact was not dramatic, because the shekel continued to strengthen and was not affected.” –
Zabezhinsky explains that the exchange rate does not reflect an assessment of how much the shekel is worth, but capital movements. “As the market abroad rises, the institutions sell foreign exchange to remain at a similar exposure, and as the market in Israel rises, they sell foreign exchange to increase exposure to Israel. This is a process that can continue until the direction of the markets changes for whatever reason – but it doesn’t happen that quickly.” Indeed, even with the geopolitical situation heating up, the markets are not excited, and the shekel continues to break records.
The Bank of Israel is not expected to intervene
Industrialists are calling on the Bank of Israel to cut interest rates in efforts to curb the strengthening of the shekel, which is harming export profitability. However, economists insist that the strengthening of the shekel is good for the economy and the Israeli market – it has a positive effect on imports, the cost of raw materials for industry, household consumption and, above all, curbs inflation. The Bank of Israel has repeatedly stressed that the main motive of the Bank of Israel Monetary Committee is the annual inflation target (1%-3%), and at its current level of about 2%, the bank will not rush to cut interest rates.
The Bank of Israel Governor has clarified that if the war in Iran is indeed over, there may be two more rate cuts this year. “The problem is that it doesn’t help. In January, the bank unexpectedly cut the interest rate and it barely moved the shekel,” Zabezhinsky recalls.
Another way to halt the strengthening of the shekel is through intervention in the foreign exchange market. “I don’t think the Bank of Israel will do this, because the Americans are very sensitive on this issue. They see anyone who tries to weaken a currency as acting in manipulative ways to gain a competitive advantage,” Zabezhinsky says.
One of the reasons the Bank of Israel has refrained from lowering interest rates so far is the tight labor market, a major factor in which is the widespread callup of reservists. This is leading to rapid and high wage increases in the business sector, and the ratio of vacant jobs to unemployment remains high.
Another reason cited by the Bank of Israel is the fiscal reality. The costs of the war so far are estimated by the bank at NIS 405 billion. Correspondingly, government debt has risen in relation to GDP and the civilian investments that stimulate the economy have been eroded and reduced. Thus, the debt-to-GDP ratio has climbed sharply from 60% on the eve of the war to the 70% expected by the end of the year. The Governor also referred to the Prime Minister’s plan to allocate another NIS 350 billion to the Ministry of Defense over a decade, which would bring the debt-GDP ratio to 83%.
Meanwhile interest repayments on the debt has soared and It is likely that the Bank of Israel will look towards the prospect of a profound security change that will moderate this situation. This makes the strengthening of the shekel as only one factor in setting interest rate policy.
Published by Globes, Israel business news – en.globes.co.il – on May 6, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.
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