Israel Weighs Measured Intervention as Shekel Strengthens Amid US Dollar Decline
Amid rising layoffs in Israel's high-tech sector, partly attributed to the strengthening shekel increasing labor costs, questions arise about the role of the Israeli government and Bank of Israel in managing the currency exchange rate. The dollar stands at 2.97 shekels, up from a recent low of 2.80. The dollar's weakness is partly due to deliberate US government policy, prompting analysis of the dollar's behavior against multiple currencies.
Over the past two and a half years, the dollar's exchange rate can be divided into three phases: in 2024, the dollar strengthened against most currencies except the shekel amid large US deficits and in anticipation of Trump's 2025 inauguration; in 2025, US policies aimed at improving trade conditions led to a deliberate dollar weakening, with the shekel appreciating about 14% and the euro about 13%; and in early 2026, exchange rate variations have become more country-specific.
Bank of Israel faces two main reasons to intervene: the rapid pace of exchange rate changes and the fact that the dollar's strengthening is driven by US policy not targeted specifically at the shekel. However, arguments against intervention include Israel's strong long-term fundamentals such as economic growth and high birth rates, with the exchange rate acting as an automatic stabilizer. Israeli companies routinely hedge currency risks, though this hedging carries costs and potential missed gains if the dollar strengthens.
Bank of Israel seeks a balance by avoiding direct market control while using interest rate adjustments and selective foreign currency purchases to smooth exchange rate fluctuations, providing businesses more time to adapt. Some argue that institutional investors' hedging against US stock market rises also influences currency movements, but this overlooks Israel's high savings rate and young median age, which are economic strengths.
Market option players show that protection against shekel depreciation remains more expensive than against appreciation, influenced mainly by security concerns. The Bank of Israel could theoretically use options markets to signal short-term exchange rate expectations at minimal cost. Meanwhile, broader government support should focus on addressing Israel's economic vulnerability to high living costs, as the low dollar rate has not fully translated into lower consumer prices. Ultimately, sustained healthy growth remains essential for economic stability.
