Many eyebrows were raised at the end of last week when Citi published a ‘warning’ about the Israeli currency. In a letter to investors the bank insisted, “The shekel looks expensive compared with its proper pricing,” and added that it is 19% too strong against the US dollar. Citi did not elaborate on any geopolitical or economic reasons for the forecast and only explained that it is based on their model.
The bank claimed that in their opinion the Israeli currency should weaken to a level of NIS 3.87/$. They noted that they were publishing this specific forecast on the Israeli currency “due to customer demand,” meaning the desire of foreign investors to invest in Israel. And that demand is understandable. The shekel has been one of the strongest currencies in the world since the beginning of the year, during which time the dollar has weakened against the shekel by 12% to NIS 3.22/$.
The Bank of Israel says the opposite
Citi’s forecast for the shekel exchange rate has surprised many institutions in the local market. According to a senior economist, “It seems strange to me. No one thinks so. I wouldn’t attach too much importance to their model and I wouldn’t rely on this document, unless the Nasdaq falls by 30%, or if we go to war with Iran with very bad results for Israel.”
In addition, about a month ago, the Bank of Israel presented a completely opposite forecast and even claimed that without the two years of judicial reform and the war, the shekel would have continued to strengthen and reached NIS 3/$, due to the gains on Wall Street. The only one that can “stop” the strengthening of the shekel is the Bank of Israel itself, which holds huge foreign exchange reserves worth $231 billion.
The reasons for the surge in the Israeli currency range from the improvement of Israel’s security position vis-à-vis Hezbollah, Hamas and Iran, to the gains on Wall Street, which lead to the purchase of shekels by institutions (pension and provident funds) that are required to balance the exposure to the dollar in their portfolio, and in the process strengthen the shekel. At the same time, Israel is an export-oriented country. Tech companies sell in dollars worldwide and bring them to Israel, where they need to convert the currency into shekels to pay their employees’ salaries, a move that also strengthens the shekel. These factors are known as the “fundamental forces” that have strengthened the shekel in recent years.
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“A one-off finding”
The unusual strengthening of the shekel must also be seen in a broader context. The strengthening of the shekel came after a no less significant weakening in the previous two years. This was in the wake of the proposed judicial reform and the protests against it, and then October 7, which pushed the local currency to a nadir of almost NIS 4.08/$.
“This is not a phenomenon unique to the shekel. According to Citi data, the Canadian dollar is overvalued by 25%, while the Japanese yen is overvalued by 29%,” says Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank, who suggests putting Citi’s document into perspective. “This is a point-by-point finding. The theoretical exchange rate (which Citi calculates) changes relatively slowly, due to being the result of a model calculated over time. The actual rate is much more volatile (as mentioned, between NIS 4/$ and NIS 3.2/$ in just the last two years).
“Citi economists admit that the results of the models and their combination may yield huge differences. It is not for nothing that the Bank of Israel announced the purchase of up to $30 billion for its foreign exchange reserves and, two years later, the sale of up to $30 billion of the reserves in order to moderate exchange rate fluctuations.”
He adds, “Most of the shekel’s overvaluation according to Citi has accumulated in the last seven months (since April) and this can be linked both to the success of the operation against Iran and to the political settlement that was reached later and may constitute a vital step on the way to important regional developments such as the expansion of the Abraham Accords. Also, some of the overperformance of the shekel against the dollar is reflected in the overperformance of the local stock market versus overseas markets.
Tamir Hershkovitz, Director of the Investment Department at Ayalon, also believes that the direction is actually a strengthening of the shekel. “The shekel is one of the strongest currencies in the world during the longest war in our history and on seven fronts.
“We estimate a continued strengthening of the shekel mainly due to real and financial investments next year, a sharp decrease in hedging costs in the financial markets, which will make it easier for institutional bodies to further reduce their dollar exposure, as well as continued increases in the US stock markets. Israel is expected to be the fastest growing economy in the Western world in 2026. I don’t see that happening and the currency being devalued like this.”
Published by Globes, Israel business news – en.globes.co.il – on December 15, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
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