We like a strong shekel. It feels like a bonus: the dollar drops, a vacation in Greece becomes cheaper, shopping on Amazon is more worthwhile, and everything suddenly seems more accessible. But this is a convenient illusion. Israel does not live on vacations — it lives on exports. High-tech, industry, services and defense all sell to the world in dollars. When the shekel strengthens, each of those dollars erodes in value. Profitability shrinks, competitiveness is harmed, and the pressure begins to seep in beneath the surface.
This does not happen in a single dramatic headline, but quietly: investments are postponed, hiring freezes, projects are shelved. Then come budget cuts, and eventually layoffs. This is not a collapse — it is erosion. And it suddenly becomes dangerous because it is gradual.
The numbers tell the story: a 1% appreciation of the shekel leads, within about two years, to a roughly 0.8% decline in exports for an average industrial company and about a 0.3% drop in employment. It also hurts domestic sales, as imports become more competitive. Now multiply that by reality: the shekel has strengthened by about 20% in a short period. This is no longer a fluctuation — it is a trend.
Suddenly, that cheaper vacation looks less appealing when the job financing it feels less secure.
The real estate market is also feeling the impact — not because of steel or cement, but because of people. A housing market needs strong buyers, and buyers depend on a stable labor market. When companies begin tightening spending, households become more cautious. Less confidence means fewer transactions.
The impact does not stop at Israel’s borders. For foreign investors — particularly Jews holding capital in dollars who are considering making aliyah to Israel or purchasing property — the strong shekel changes the picture: an apartment that cost about $1 million a year ago now costs significantly more. Not because the price increased, but because each dollar buys fewer shekels. From their perspective, Israel has become tens of percentage points more expensive without any change in housing prices.
It is common to explain the strengthening of the shekel through favorable data: a low debt-to-GDP ratio, a controlled deficit, a current account surplus and capital inflows. This is the narrative widely presented in the media and in Finance Ministry corridors, and it sounds compelling. But it does not truly explain what is happening in practice.
The real reasons are simpler — and mainly technical. This is not just about confidence in the economy or macroeconomic data, but about recurring flows: institutional investors selling dollars to hedge exposures when markets rise, and the high-tech sector converting dollars into shekels after exits and realizations. These forces create daily, almost automatic pressure to strengthen the shekel, largely disconnected from the macroeconomic story presented to the public.
So why is this happening? Here the real dynamic comes into play — and it is less intuitive.
The first factor is institutional investors. Israel’s pension and provident funds invest a large share of their assets abroad, mainly in the United States. But they do not want to take on currency risk, so they hedge much of their dollar exposure. What happens when the U.S. market rises? The value of dollar-denominated assets increases, and to maintain the same level of exposure, they must sell dollars and buy shekels. In other words, every rise in the S&P 500 creates pressure to sell dollars.
Here lies the unusual phenomenon: an almost perfect inverse correlation between the U.S. stock market and the dollar-shekel exchange rate. The S&P rises and the shekel strengthens — not because of economic fundamentals, but due to hedging mechanics. This is no longer a “free market” in the classic sense, but a technical, recurring flow.
The second factor is high tech. Every exit, every IPO, every employee stock option realization brings dollars into the economy. In most cases, those dollars are immediately converted into shekels. This is not a one-time event — it is a daily flow.
Together, these two forces create sustained pressure for the shekel to strengthen, largely independent of interest rates, inflation or macroeconomic indicators.
And the Bank of Israel? It has two main tools: interest rates and intervention. Interest rates in Israel remain relatively high, around 4%, while in the United States they have already declined to about 3.75%, and in Europe even lower. Theory suggests that interest rate differentials attract capital and strengthen a currency, but in this case, that effect is marginal compared to the other forces.
The second tool is dollar purchases. In the past, this was a central instrument. Today, the Bank of Israel is far more cautious, partly out of concern over international criticism and even potential measures from the United States, as seen in other cases worldwide. The result is a cautious policy facing more aggressive forces.
It is true that the dollar is weakening globally. But the shekel is also strengthening against other currencies — and more sharply. This is not only a global phenomenon. It is a local problem.
There is no doubt that solutions exist: from establishing mechanisms to reduce immediate pressure on the foreign exchange market, to regulatory changes that allow greater flexibility in institutional foreign currency exposure, to developing dedicated hedging tools and adopting more gradual currency conversion practices. But this requires a different kind of thinking — one that recognizes the problem rather than settling for convenient explanations.
Netanel Ariel is CEO of Tamir Fishman Mutual Funds.
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