Dollar Rebounds Toward NIS 3 as Institutional Investors Rebalance

The dollar has recovered sharply against the shekel after hitting around NIS 2.8 in late May, a level not seen for three decades. In recent weeks the U.S. currency has risen almost 7% against the shekel since the start of the month, returning to trade near NIS 3, a level last seen about two months ago.

Economists say the reversal reflects a mix of geopolitical and market forces. Shmuel Katzbian, chief strategist at Discount Bank, said the shekel weakened recently mainly because of concerns over the implications of a U.S.-Iran agreement for Israel’s strategic position, after a long period in which the shekel had strengthened on improved perceptions of Israel’s security and strategic outlook. He also pointed to adjustments by institutional investors, who had been overexposed to foreign currency and foreign assets through mid to late 2024 and later reduced those positions, leaving them underexposed to forex. Ran Sini, chief economist at Ultra Finance, said the sharp decline in the dollar forced institutions to rebalance portfolios and, in practice, some resumed buying foreign currency or at least stopped selling dollars at the earlier pace, creating a floor for the exchange rate.

Market watchers also cited recent Wall Street declines. Ronen Menachem of Mizrahi Tefahot said falling U.S. stocks, including a 2.1% weekly drop in the Nasdaq and 1.3% yesterday, tend to weaken the shekel. He added that Bank of Israel communication and its point intervention in the currency market during May may have also helped change direction, and a similar move may have occurred this month. The dollar is also strengthening globally, gaining 1.5% against the euro and 1.4% against sterling over the past week, as markets price in a possible 0.25% to 0.5% U.S. rate hike by year-end.

Looking ahead, analysts expect continued volatility. They say the exchange rate will be driven by regional risk, energy prices, bond markets, U.S. inflation data, the Federal Reserve’s tone, and the PCE report due later this week. Menachem said proximity to the NIS 3 level could lead traders to pause and reassess, while Katzbian argued that structural factors still support the shekel over the longer term, including strong Israeli high-tech service exports, rising defense exports, falling Israel risk premium, and expectations of stronger U.S. equities in a year. He said investors with a one-year horizon or more may consider using dollar rallies to hedge or sell foreign currency gradually, while noting that the near-term trend is less certain.