Dollar Surges Above 3 Shekels Amid Chip Market Turmoil and Geopolitical Tensions

The US dollar has risen above the psychological threshold of 3 shekels for the first time since late April, driven primarily by disruptions in the global semiconductor market and heightened geopolitical tensions. Despite pressure from Israeli high-tech companies and industrialists and intervention attempts by the Bank of Israel, the dollar's rebound reflects broader external factors rather than domestic developments or the situation in the Strait of Hormuz.

A key factor behind the shekel's previous strength was the booming AI sector, particularly the Israeli chipmaker Mellanox, a subsidiary of Nvidia, which exports around $20 billion annually. Mellanox’s need to convert large dollar revenues into shekels had bolstered the local currency. However, a recent 8% drop in the global SOX semiconductor index, reflecting AI sector weakness, triggered declines in tech stocks worldwide, including in Israel, weakening the shekel against the dollar.

Additionally, the shekel’s decline against multiple currencies signals an increased geopolitical risk premium amid ongoing tensions between the US and Iran and between Israel and Hezbollah in Lebanon. These regional uncertainties have led investors holding shekels to demand higher compensation for risk.

Looking ahead, the Bank of Israel is expected to cut interest rates by 0.25% next week, from 3.75% to 3.5%, despite US data suggesting potential Fed rate hikes. Analysts caution that the dollar’s strength complicates monetary easing by increasing import costs and inflation risks. The central bank’s forthcoming economic forecast will be closely watched for indications of its policy path in 2027, especially given the election year and persistent fiscal deficit.

Meanwhile, Israeli consumers face higher costs for dollar-priced goods and services, such as flights and online purchases, though fuel prices for July are set to drop significantly due to falling oil prices amid US-Iran negotiations.