US-Iran Tensions Drive Dollar Surge, Weighing on Israeli Shekel

The US dollar opened the week above 3.05 shekels amid renewed geopolitical tensions between the United States and Iran, prompting investors to seek safe-haven assets. This ongoing uncertainty is expected to keep the Israeli shekel under pressure despite potential interventions by the Bank of Israel.

Over the past month, the dollar has strengthened approximately 2.6% against the shekel, and about 4% over the last three months. The euro also rose by around 3.8% in the past month but remains about 5.6% weaker against the shekel since the start of the year. Ran Sinai, chief economist at Ultra Finance, attributes these currency movements primarily to the geopolitical arena, noting that the US-Iran conflict reduces appetite for riskier currencies like the shekel, which is sensitive due to Israel's small, open economy.

Historically, the shekel benefited from strong investment inflows and high export volumes, but currently it is more affected by rising regional risk premiums. Sinai also points out that this weakening trend is not unique to Israel; other emerging markets such as India have experienced capital outflows and currency pressures amid global uncertainty. Central banks, including those of the US and Japan, have recently intervened to curb excessive currency volatility, a strategy mirrored by the Bank of Israel, which has acted to smooth sharp fluctuations and maintain market stability.

Alongside geopolitical tensions, technical factors like portfolio rebalancing and institutional adjustments in foreign currency exposure have contributed to the shekel's decline. Despite short-term fluctuations possibly triggered by political statements or diplomatic developments, the near-term direction of the shekel-dollar exchange rate will largely depend on the geopolitical situation. The Bank of Israel is expected to continue stabilizing efforts during extreme volatility but is unlikely to reverse the overall trend while security uncertainties persist. Similarly, the euro-shekel exchange rate will remain influenced mainly by geopolitical rather than local macroeconomic factors.