New forces at play as shekel appreciates

The forces determining the shekel-US dollar exchange rate are not quite the same as they were, according to senior market analysts. The exchange rate has risen in the past twenty-four hours to over NIS 3.16/$, against the background of declarations by the US administration and the growing fear of a trade war between the US and the EU, but in the past few weeks it has been around NIS 3.14/$ and even lower. The rate has been at its lowest for four years.

The Bank of Israel stated this week that in the second half of 2025 the shekel continued to strengthen against the US dollar, by about 6%, after a similar rate of appreciation in the first half of the year. Israel’s improved position and the confidence of the markets contributed to this appreciation. During 2025, Israel’s risk premium, as measured by the CDS (credit default swap) and spreads on dollar-denominated government bonds, fell significantly, at first after the Rising Lion campaign against Iran in June and then again after the declaration of the ceasefire in the Gaza Strip, until by the end of the year the premium was only slightly higher than it was before the war.

In addition, during the second half of 2025 international credit rating agency S&P upgraded its outlook for Israel’s sovereign rating to”Stable”. To that can be added the Tel Aviv Stock Exchange, which outperformed other markets, and the strengthening of Israel’s exports in high tech and defense.

The shekel-dollar rate is affected by a combination of internal and external factors. Despite the recent slight weakening of the shekel as fears of a global trade war have risen, it appears that local and structural factors have become more important lately.

Traditionally, the main predictor of movement in the shekel has been the trend in stock indices in the US. This is because Israeli financial institutions allocate a substantial part of their investments to overseas markets, but keep their exposure to foreign exchange fluctuations within a certain limit. When US markets rise and the value of the institutions’ dollar assets rises with them, their exposure to the dollar increases and exceeds the limit. They therefore need to hedge by selling dollars and buying shekels to cover the exposure. The increased supply of dollars and demand for shekels causes the price of the shekel in dollar terms to rise. The result is a direct correlation: when US markets rise, the shekel strengthens against the US dollar, and when they fall it weakens. This correlation has diminished recently.

Bank of Israel unexpectedly cuts interest rate

“The connection is not as clear as it was

Harel Dotan, head of derivatives, forex and interest rates at Menora Mivtachim Insurance, explains that the weakening of the US dollar is a global process. “It’s part of the moves introduced by Trump and stems from his desire to weaken the dollar with the aim of reducing the huge US trade deficit and strengthening local industry. There are also global factors. If we look at the shekel against the euro, for example, we can see that although it has strengthened, it has not done so as dramatically as it has against the dollar, since the euro itself has strengthened by 12% against the dollar in the past year.”

Meitav chief economist Alex Zabezhinsky says, “This link, which has existed for years except in 2023 and partly in 2024, is now no longer as clear as it was. In general there was a coefficient such that for every rise of 1% in the S&P 500 Index the shekel strengthened by 0.3%, but now the shekel has strengthened by much more.”

Why is that? “It could be that there are other forces buying shekels besides the financial institutions, and that that has led to appreciation of the shekel beyond what derives from the rise in US stock markets. These forces could be foreign financial institutions, Israel’s business sector, and so on,” Zabezhinsky explains.

In addition, he points out that the phenomenon could be due to the Israeli institutions themselves. “They may be buying more shekels because they have decided to hedge their foreign currency exposure even more because of the appreciation of the shekel. Suppose that they maintained an exposure of 20% and decided to reduce it to 18% – that would have an immediate impact. But we’ll only know in retrospect what the actual exposure was.”

Another index takes center stage

In addition to that, Zabezhinsky points to a new trend: a significant strengthening of the correlation between the shekel exchange rate and the MSCI All Country World Index. He says that this change is not coincidental and could be a concrete expression of the fact that “investments by the financial institutions have shifted away from the US, and this makes a great deal of sense.” He makes clear that the US is still dominant in most portfolios, but that it is enough for a percentage to be transferred away from there for the effect to be felt in the foreign exchange market.

This is because the institutions have to respond not just to the US market but also to other markets which have risen by more than the US market recently. Zabezhinsky adds the reservation that the MSCI index itself is about 60% composed of the US market, but points out that “in general investment used to give a higher weighting to the US and I think that we are now seeing a return to a lower weighting for the US all over the world.”

Dotan says that the shekel has been unusually strong lately in a way that exceeds the familiar correlation with the stock indices. He suggests that behind this may lie expectations of deep change in the region. “The strengthening of the shekel beyond the usual correlation could stem from hopes of the collapse of the regime in Iran. Such an event could lead to a change in the map of threats to Israel.”

Israelis investing less in S&P 500

According to Dotan, another factor behind the strong shekel is the fading of the trend of investment in funds tracking the S&P 500 Index. “In 2023-2024 we saw a strong flow of money to these funds, but in the past year they have achieved lower returns than general investment tracks,” he says, the reason being that they are fully exposed to currency fluctuations, while the Israeli stock market has risen more sharply.

Interest rate cut not stopping the shekel

The Bank of Israel’s decision to cut its interest rate to 4% two weeks ago has not halted the appreciation of the shekel. “The link between the interest rate and the currency has weakened in recent years,” explains Zabezhinsky, adding that “The impact does not come from small changes. It could be that if the bank were to cut the interest rate drastically it would be felt more.” The central bank’s arsenal is therefore reduced. “Intervention in the foreign currency market is not acceptable to the US administration,” he says.

Published by Globes, Israel business news – en.globes.co.il – on January 21, 2026.

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