Institutional Investors Drive Israeli Shekel Volatility Amid Iran Tensions and Bank of Israel Interventions

The Israeli shekel has recently reversed its downward trend against the US dollar, climbing above 3 shekels per dollar after hitting a low near 2.8 shekels just a month ago. This roughly 7% increase reflects a shift from earlier conditions that had pushed the dollar to historic lows, including eased tensions with Iran, strong global markets, and reduced exposure by institutional investors.

However, recent weeks have seen a reversal due to several factors: the Bank of Israel's consecutive monthly dollar purchases totaling nearly $1.8 billion, renewed geopolitical tensions in the Middle East, and increased volatility in global markets. Market analysts emphasize that institutional investors are the primary force influencing the shekel-dollar exchange rate. These investors maintain large hedging positions exceeding $90 billion, causing significant currency movements in response to even small percentage changes in the US stock market.

When US markets rise, institutional investors often sell dollars to rebalance their exposure, strengthening the shekel. Conversely, market downturns prompt large dollar purchases, weakening the shekel. Recently, these investors have sharply reduced their foreign currency exposure, selling a record $29 billion over the past three quarters, which has bolstered the shekel. Yet, the shekel remains highly sensitive to US market fluctuations, with declines in the Nasdaq having nearly twice the impact as gains.

The Bank of Israel's interventions, officially aimed at market stability rather than monetary policy shifts, signal a readiness to support orderly markets amid geopolitical uncertainty. Economists note that the bank has shifted toward a more accommodative stance, with interest rates expected to fall to around 3% within a year. This outlook reduces the shekel's investment appeal, increasing depreciation pressure.

Meanwhile, renewed conflict between Iran and the US has pushed Brent crude oil prices back to about $76 per barrel, elevating global risk premiums and boosting demand for the dollar as a safe haven. The dollar is also near a one-year high against a basket of currencies due to strong investor inflows into US Treasury bonds. Market sentiment remains divided on Wall Street, but any escalation in Iran-related tensions could trigger further dollar purchases by institutional investors, strengthening the US currency and moving it away from recent lows against the shekel.