The Shekel Rises: Will Its Exchange Rate Drop Below 3 Shekels to the Dollar?

SadaNews - Translation by Sada Economy: Security developments have pushed the shekel's exchange rate to a level not seen for over 30 years. The shekel is strengthening its position as the strongest currency against the US dollar this year, with a yield exceeding 20%. It's not only local optimism that supports the shekel; the global weakness of the dollar also contributes to its strength. The ceasefire with Iran, along with reports of negotiations for an agreement with the Lebanese government, has driven the shekel's exchange rate on Friday to a level not seen for over 30 years, standing now at 3.03 shekels to the dollar. But is it on track to set a new record and drop below 3 shekels? For months, the shekel has cemented its status as the strongest currency against the US dollar this year, achieving a yield over 20%. Until recently, reaching its current peak seemed like a fantasy, but in recent months, especially since the war in Gaza ended, some have anticipated arriving at that point. For example, Discount Bank of Israel wrote a few months ago: "In our baseline forecasts, we expect the dollar to fluctuate between 3 and 3.12 shekels by the end of 2026, which means a higher increase compared to Bloomberg's forecasts.” Tamir Hirshkovitz, Senior Vice President and head of the investment division at Ayalon Insurance and Finance in Israel, has affirmed his forecasts of the shekel reaching 3 shekels in recent months. Last February, he stated to the Hebrew newspaper Globes: "In light of our experience, we have seen how the Israeli economy and the shekel have remarkably recovered from significant events. Therefore, I see the trend clearly - below 3 shekels to the dollar, and this will happen much faster than we imagine." Even Professor Leo Leiderman, head of the IREES Research Institute at the Israeli Peres Academic Center, and Chief Economic Advisor to Bank Hapoalim, as well as former head of the research department at the Bank of Israel, estimated on the eve of the war with Iran that this could be just the beginning. One event could lead to a depreciation of the shekel to around 2 shekels to the dollar - the collapse of the regime in Iran. This situation would lead to massive capital inflows into Israel, a sharp decrease in the risk premium, regional prosperity, and investments on a historic scale. Will the Bank of Israel intervene? But it’s not just local optimism that supports the shekel; the global weakness of the dollar plays a role as well. The US dollar has lost a significant portion of its value over the past year against major currencies, despite a recent improvement in the backdrop of the war in Iran. The foreign exchange market is highly complex and is affected by various factors including capital movements, monetary policy, and the macroeconomic data of each country, according to Sada Economy's translation. In the case of the US, all these factors converged with the current administration's interest in weakening the dollar to improve the conditions for exporters and local industry. There are winners and losers from the strength of the local currency. On the positive side, its effect on slowing inflation, which has dropped to the stability target level set by the Bank of Israel (below 3%), is notable. The Bank of Israel attributes this, among other things, to a decrease in the Israeli risk premium, as measured by the Credit Default Swap (CDS) index, which is insurance against default. This premium has indeed risen in recent weeks due to the war with Iran, but as mentioned, it is still far from the status that prevailed after October 7, and even higher than it was in previous rounds with Iran. Another possible explanation for the shekel's strong performance lies in the activities of financial institutions. According to a study by the Metaf Investment Foundation, the average exposure of the ten largest financial institutions, in general, has declined to less than 19% in December. This level is lower than it was at the end of 2022, on the eve of the legal reform and the conflict surrounding it that shook the economy. Additionally, financial institutions sold foreign currencies worth $13.3 billion in the last quarter of 2025, the highest level ever.