Israeli Importers Capitalize on Shekel Strength as Dollar Falls Below 3 Shekels

New data from the Bank of Israel reveals the key forces behind the shekel's recent appreciation. While institutional investors have continued to sell dollars amid the strengthening shekel, importers and the business sector seized the opportunity presented by the dollar's drop below the 3-shekel threshold in the second quarter of 2026. In just three months, the business sector purchased foreign currency volumes typical of an entire year, totaling about $12 billion in Q2 and approximately $24 billion over the past four quarters. These purchases aimed to lock in the low dollar rate and help reduce import costs.

Economist Alex Zvezhinsky from Meitav Investment House explained that importers increased foreign currency buying at the dollar's low point of around 2.8 shekels, benefiting from cheaper raw materials, investment products, and finished goods. Conversely, exporters faced a less favorable period. Foreign investors showed relatively moderate activity recently, with no significant market fluctuations, though some minor speculative activity by foreign residents may have occurred.

The Bank of Israel intervened tactically in the foreign exchange market in May and June, purchasing around $1.8 billion to ensure market stability after detecting irregularities. This intervention likely encouraged many importers to start buying dollars independently. Meanwhile, institutional investors sharply reduced their foreign currency exposure over several quarters, a trend intensified by rising hedging costs following three interest rate cuts by the Bank of Israel this year, contrasting with the US Federal Reserve's high rates.

This dynamic led to a rapid decline in foreign currency exposure from 17% to about 13% of public financial assets, coinciding with a strong shekel and robust stock market performance until two months ago. Recently, the public has resumed foreign investments, signaling a market turning point. Market strategist Yonatan Katz noted that the US stock market's performance will heavily influence the shekel-dollar exchange rate going forward.

Finance Minister Bezalel Smotrich attributed the shekel's strength to real economic activity, expecting the exchange rate to remain stable. Zvezhinsky added that absent security events, the shekel's fluctuations will closely follow the US stock market, reflecting institutional investors' exposure. He concluded that while the shekel has solid fundamentals, it remains influenced by multiple factors including security developments and financial market trends.