Institutional investors weakening shekel – Globes

The shekel-dollar exchange rate, which just last month was NIS 2.8/$, has sharply changed direction in recent weeks and is back above NIS 3/$. Although the shekel remains extraordinarily strong from a historical perspective, it has depreciated about 7% from is strongest point. How can the volatility be explained? In short: The perfect storm that pushed the dollar to the low point against the shekel – the easing of tensions with Iran, a strong run in the world markets and a reduction in exposure by institutional bodies has almost completely reversed.

Now, a series of factors are pushing in the opposite direction. The Bank of Israel has intervened for two consecutive months and purchased foreign currency, the winds of war in the Middle East are again growing in strength, and global markets have fallen after a period of sharp gains. Above all, the market explains that the factor that most affects the exchange rate is the hedging measures taken by investment institutions, which in periods of decline in the markets are forced to close positions and buy dollars. The enormous scope of their hedging, over $90 billion, means that every 1% change on Wall Street means large scale buying or selling of dollars.

Institutional investors maintain a policy of constant exposure to foreign exchange, which creates a close correlation between Wall Street and the shekel exchange rate. When the US stock market rises, the value of the institutional investors’ dollar assets increases, creating a deviation from planned exposure levels. To return to balance, they are forced to sell dollars in huge amounts, and this action immediately strengthens the shekel. Historical data shows that 75% of the time the US stock market is on an upward trend, so it is a constant and strong force that supports the shekel over time.

But recently, institutional investors have taken this trend one step further and sharply reduced their base exposure to foreign exchange. In the last three quarters, a combination of this strategic shift and ongoing hedging activity has led to institutional investors selling a record amount of nearly $29 billion, giving the shekel a powerful tailwind.

On the other hand, when the market changes direction, this pendulum swings even more strongly. As Israel Discount Bank market strategist Shmuel Katzavian explains, when Wall Street falls, the effects are felt more sharply than when it rises: “In intraday models, we see that the shekel’s sensitivity to downward movements on the Nasdaq is almost twice as strong as its sensitivity to upward movements. In our assessment, this is an exceptional situation that will not last long.”

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This effect often also produces a self-fulfilling prophecy. Another capital market activist explains that market players are trying to get ahead of the institutions: “What will move the market is mainly the hedging of the institutions. The players are trying to guess the next move, and then the market simply runs to buy or sell ahead of them.”

The bank of Israel’s gift

The institutional investors are the main force, but they are far from the only ones moving the foreign exchange market. The Bank of Israel recently revealed two figures that seemingly support the weakening of the shekel. The first is the research division’s macroeconomic forecast, which predicted that in a year’s time the interest rate in Israel will fall to 3% – a sharp drop from market estimates.

The second figure is the direct intervention by the Bank of Israel, which purchased foreign currency worth over $1 billion in June. This is the second consecutive month of intervention, after the previous month it purchased foreign currency worth about $800 million. In both cases, the official justification was maintaining regular market activity and not monetary policy, but the message to the market was well received.

In addition, a kind of monetary cycle has been created. The shekel has strengthened, inflation has moderated, and the Bank of Israel has been given room to cut the interest rate. However, now that the bank is signaling that the rate will continue to fall, the markets are repricing the Israeli currency. The lower the rate in Israel is expected to be, the lower the relative advantage of investing in the shekel is eroding, and the pressure for depreciation is increasing.

Mizrahi Tefahot Bank chief economist Ronen Menachem explains that the Bank of Israel has “changed gear” and moved to a more expansionary policy, due to the feeling that geopolitical developments have made this possible. However, it could be that in the wake of the security escalation, the Bank of Israel will be forced to halt forex purchases until things become clearer.

Altshuler Shaham Financial Services founder and co-CEO Yossi Menashe emphasizes that even if this is a one-off move, it has a psychological effect: “This is a clear signal that the Bank of Israel continues to closely monitor the exchange rate, and is ready to act actively at any moment it identifies a need to protect the integrity of the markets.”

Consequences of the escalation in Iran

After a period of relative calm in the Iran-US conflict, a renewed flare-up was recorded that pushed the price of Brent oil back to the $76 per barrel area. The events re-launched the global risk premium, strengthening demand for the dollar as a global safe-haven currency. “As long as energy prices remain high and markets price in uncertainty, the shekel will be affected not only by the Bank of Israel’s domestic policy, but also by the direction of the dollar, US bond yields and developments in the Middle East,” says Menashe.

Meanwhile, the US dollar is close to a one-year high against a basket of currencies. Among the reasons: Investors seeking a safe haven are diverting billions of dollars to US bonds, which is boosting the currency.

Where do we go from here? Wall Street is divided and broadcasting conflicting forecasts. Regarding the shekel, the most significant force at the moment is the institutional investors. But negative sentiment on Wall Street as a result of the escalation in Iran could translate into a wave of institutional dollar purchases, which would further strengthen the US currency and move it away from the lows we have seen recently.

Published by Globes, Israel business news – en.globes.co.il – on July 9, 2026.

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