Shekel Weakens Sharply Against Dollar Amid Rising Risk and Market Pressures

In the past month, the Israeli shekel has sharply weakened against the US dollar, crossing the 3-shekel-per-dollar threshold after previously trading below 2.8 in May. This decline makes the shekel one of the weakest currencies globally during this period, with only the Norwegian krone and Russian ruble performing worse due to falling oil prices. Moody Shapira, Chief Financial Markets Strategist at Bank Hapoalim, attributes the shekel's sudden depreciation to several factors including the global dollar strengthening by over 2%, increased Israeli risk premiums following the US-Iran agreement, Bank of Israel interventions, Nasdaq declines, and interest rate differentials between Israel and the US.

The risk premium on Israeli bonds, measured by the spread between Israeli and US bond yields and CDS contract prices, has fluctuated significantly since 2022. It peaked during the judicial reform controversy and the outbreak of war in October 2025, then dropped sharply after the ceasefire agreement, but has been rising again to about 54 basis points. This premium reflects investor perceptions of Israel's geopolitical risk. Concurrently, institutional investors in Israel have reversed a previous trend by increasing their foreign currency exposure from 19.1% in March to 20.5% in April 2026, signaling heightened risk concerns despite the ceasefire.

Interest rate differentials also pressure the shekel, as Israeli markets price a 2.9% interest rate for next year while US markets anticipate further hikes despite easing inflation expectations. Bank of Israel reportedly purchased around $800 million in May to stabilize the currency and likely continued interventions in June. Governor Amir Yaron indicated that as inflation expectations approach the 1% lower bound, monetary policy may become more accommodative with faster rate cuts.

External factors such as significant declines in US tech stocks have influenced the shekel through institutional investors adjusting currency exposure to maintain portfolio balance. Analysts warn that the shekel remains historically strong compared to the past 30 years but is vulnerable to global market shifts. Bank of America recommends a long position on the dollar against the shekel with a target of 3.14 shekels per dollar over three months, while Goldman Sachs had earlier advised selling shekels before the March 2026 escalation with Iran.

Despite the current weakness, fundamental supports for the shekel remain, including Israel's export surplus and robust high-tech investments. Bank Hapoalim expects a 100% probability of an interest rate cut in July, though not aggressively. The strategist Moody Shapira notes that while a strong shekel has helped curb inflation recently, a sustained weaker shekel over the next six months could lead to higher inflation, marking a gradual process rather than an immediate shift.