Shekel Strengthens 3% Against Dollar Amid Israel's Economic Dynamics

Since the beginning of the month, the Israeli shekel has appreciated by 3% against the US dollar, trading again below 3 shekels per dollar. This renewed focus on the exchange rate follows a year in which the shekel strengthened over 20%, making it one of the strongest currencies globally. While the recent appreciation is more modest, it remains significant, especially given Israel's export-driven economy. The US dollar index (DXY) declined about 1% last month but remains up 1.4% year-to-date and 1.9% over the past year, indicating that the shekel's strength is not solely due to dollar weakness.

The nominal effective exchange rate index for Israel, akin to a "basket of currencies," dropped from 63.3 to 61 points in three weeks, reflecting a 3.6% appreciation of the shekel. This shows the shekel's strength extends beyond just the dollar. Recent national accounts data revealed Israel's economy grew at an annualized rate of 15.4% in Q2 2026, surpassing the consensus forecast of around 8%. However, much of this growth is attributed to exports of goods produced abroad by Israeli companies, such as Nvidia and Mellanox, which inflate export figures without corresponding domestic production.

A JPMorgan report highlighted that about half of Israel's economic growth over the past three years stems from such offshore production, which also affects tax revenues and capital flows. These dynamics influence the shekel through three channels: the current account surplus from exports, repatriation of profits by foreign owners, and foreign direct investment inflows. The fiscal channel is particularly impactful, as tax payments must be made in shekels, contributing to rising tax revenues, especially income tax, which supports the economy and reduces the deficit.

Institutional investors have sold $40.5 billion in foreign currency over the past year, intensifying shekel appreciation pressures. Bank of Israel interventions, including $1.8 billion in foreign currency purchases and interest rate cuts, have temporarily eased these pressures but not reversed the trend. Recent slight depreciation of the shekel is linked to global stock market declines amid geopolitical tensions in the Persian Gulf, but experts expect this to be temporary. Overall, the shekel's appreciation reflects fundamental economic forces rather than just dollar weakness, sustained by Israel's export sector and capital flows.