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

The US dollar has risen above the psychological threshold of 3 Israeli 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 firms and industrialists and interventions by the Bank of Israel, the dollar's rebound reflects broader international factors rather than domestic developments or events in the Strait of Hormuz.

A key factor behind the shekel's earlier 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 previously supported the local currency. However, a recent 8% drop in the global semiconductor index (SOX), reflecting a slowdown in AI-related stocks, triggered a decline in the shekel, which weakened against the dollar and other currencies.

Additionally, the geopolitical risk premium associated with Israel has increased amid renewed clashes between the US and Iran and ongoing tensions between Israel and Hezbollah in Lebanon. This uncertainty has led investors holding shekels to demand higher compensation, further weakening the currency.

The dollar's strengthening means higher costs for Israelis on dollar-denominated expenses such as flights, vacations abroad, and online purchases. Imported goods prices are expected to rise over the longer term, although consumers have yet to benefit from last year's significant dollar depreciation. On a positive note, July fuel prices have dropped sharply due to falling oil prices linked to progress in US-Iran negotiations.

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 a possible Fed rate hike later this year. Economists caution that the weaker shekel and higher dollar increase import costs and inflation risks, prompting the central bank to proceed cautiously. The key focus will be the Bank of Israel's economic forecast, which will indicate whether further rate cuts are planned for 2027 or if a wait-and-see approach will prevail amid the election year and ongoing fiscal deficit concerns.