Israeli Shekel Strengthens Sharply as Investors Shift Billions from S&P 500 to Local Assets

By the end of May, the Israeli shekel had surged to 2.85 per US dollar, marking a 16% appreciation over 11 months. This rapid strengthening has raised concerns about the competitiveness of Israeli exporters, whose costs are mostly in shekels but revenues in dollars, and has made Israeli high-tech workers among the most expensive globally, impacting their competitiveness against development centers abroad.

Senior economic figures attribute the shekel's rise largely to institutional investors selling dollars due to shifts in saver preferences. At a closed-door forum at Reichman University, key players from institutional funds, the Ministry of Finance, Bank of Israel, Capital Market Authority, and Securities Authority debated the causes and responses to the shekel's appreciation. Hagai Schreiber, Chief Investment Officer at Phoenix, Israel's largest institutional investor, emphasized that currency sales are driven by savers' decisions to move funds from S&P 500-linked tracks to local equity tracks, resulting in monthly transfers of 2-3 billion shekels. He stressed that institutions merely execute these decisions.

Data presented by Guy Laken of Reichman University confirmed unusual redemptions from S&P 500-indexed savings tracks over the past year, leading to significant currency conversions. Schreiber also criticized the Ministry of Finance for a conflict of interest, noting it has borrowed over 200 billion shekels in dollar-denominated debt at a rate of 3.5 shekels per dollar and benefits from a stronger shekel, effectively shorting the dollar.

Tal Israeli from the Ministry of Finance acknowledged Schreiber's points but argued that his proposals offer only short-term relief and do not fundamentally change the market. The debate also highlighted that pension and provident funds report returns in shekels, which can obscure dollar-based investment performance. For example, over the past year, the shekel-denominated return on the S&P 500 was only 10%, compared to a 34% rise in the Tel Aviv 125 index, prompting billions in redemptions from dollar-linked tracks.

Former Capital Market Authority chairman Moshe Barkat advocated for calculating investment returns in the currency of the underlying assets to avoid unnecessary hedging costs, which he estimated at 8 billion shekels annually. Asaf Nahmani and Miriam Schwartz Ziv from the Capital Market Authority noted that shifts away from foreign investments are also evident in mutual funds and retail investors, with significant flows into non-hedged local equity funds.

According to the Securities Authority, 42% of public companies reported in their 2025 financial statements that the dollar's strength harms them, up from 33% in 2024. The forum, led by Professor Amir Barnea and Shlomi Shuv, addressed these regulatory and market challenges amid ongoing currency volatility affecting Israel's capital markets and economy.