Expert: The Israeli economy is unable to absorb the strength of the shekel in the short and medium term

Exclusive to SadaNews: Financial consultant and banking expert Mohammad Salama confirmed that the Israeli economy cannot absorb the shekel's exchange rate strength against the dollar below 3 shekels to the dollar in the short and medium term. He pointed out that the real exchange rate of the dollar against the shekel, considering all economic factors, should currently range between 3.25 shekels to 3.10 shekels and not below 3 shekels as it is currently traded.

Salama told "SadaNews" that if the dollar were to reach an exchange rate of 2.5 shekels, it would not happen overnight. Instead, it would take between 3 to 5 years, depending on various developments in the Israeli economy.

The dollar at 2.5 shekels is plausible

Salama stated: "Reaching an exchange rate of 2.5 shekels to the dollar has become plausible, but if it happens, it will require (3-5) years. However, in the short and medium term, it seems that the Israeli economy is unable to absorb the strength of the shekel," pointing out that the current problem lies in the fact that the Israeli economy cannot bear the strength of the currency due to the small size of investment vessels and the economy's ability to absorb the cash liquidity.

Estimates from the Israeli Ministry of Finance indicated that the continued decline of the dollar against the shekel in the long term is expected to last for several years, not just in the short term.

Salama emphasizes that the economy cannot absorb the current strength of the shekel, as there is no stock market where one can invest, nor is there a bond market available for buying either. If one decides to invest in any field, how can one do so at these levels or according to the current exchange rates? He noted that some of the shekel's strength originally resulted from decisions made by the Israeli central bank and its management of risks in foreign investment portfolios, compelling them to hedge and purchase shekels, representing 20% of the growth in size and the high global stocks, especially those in the U.S. Therefore, if U.S. stocks decline, it is normal for shekels purchased to be sold and for those investors to return to the dollar and their financial positions in that currency.

Hedging against dollar bonds

Regarding the forecasts of the Israeli Ministry of Finance, Salama noted that they revolve around hedging the dollar bonds sold by the ministry in the financial markets, for which it received funding in dollars as foreign debt to finance the war, where it has issued about 15 billion dollars in bonds over the last three years. Currently, the ministry is calling for selling shekels and buying dollars for hedging. Thus, the Israeli finance department states that it is not obliged to hedge or buy dollars at the current price if the general trend suggests that in 3-5 years the exchange rate of the dollar against the shekel will reach 2.5 shekels.

Salama asserts that most financial analysts expect the real exchange rate of the dollar against the shekel, when considering the pricing system based on the balance of payments and macroeconomic performance and factors of supply and demand on the currency in question, to be higher than the current exchange rate, indicating that the price should range between 3 shekels to 3.10 shekels and not below 3 shekels.

He mentions that geopolitical risks will determine the exchange rate in the coming period; if the war with Iran de-escalates, and markets perceive this as removing strategic risks from Israel and thus generating demand for investment, particularly in the technology sector, that would strengthen the shekel over 3-5 years, not overnight.

Economic growth matching shekel strength

Salama explains the reasons for the rise in the exchange value of the shekel against the dollar, stating that achieving a growth rate of 5% annually in Israel means a cumulative 15% over three years. This translates into an increase in the currency to the same extent as economic growth, which is a logical direction since the economy would have grown and attracted foreign investments, leading to increased demand for the shekel. Hence, a rise in shekel exchange value against the dollar by about 15% over three years implies reaching an exchange rate of 2.5 shekels to the dollar.

Significant decline over the year

The dollar has decreased against the shekel over the past two years by about 22.6%, as the dollar was trading against the shekel at approximately 3.70 shekels in May 2024, while in the current May it hovers around 2.90 shekels.

In contrast, the exchange rate in May 2025 ranged between 3.55 to 3.61 shekels, indicating that current exchange levels are about 18-19% lower than they were a year ago, which included an American-Israeli war against Iran.

Estimates released by the Israeli Ministry of Finance stated that any measures taken would not prevent the general trend of the dollar's decline and the rising strength of the shekel.

Salama adds: "If there is friction between Israel and Turkey, for example, or with Egypt, leading to heightened geopolitical risks, or if there are internal political disputes in Israel, preventing a government from being formed after the elections, this could result in economic deterioration." Therefore, Salama concludes that "some factors in the shekel's strength do not carry a sustainability quality and are subject to change."

He states: "The shekel is a strong currency to the extent that the Israeli economy can sustain it," pointing out that after U.S. President Donald Trump's return from China, American markets saw a decline, and the dollar internationally rose against a basket of currencies, beginning the decline of the shekel against the dollar, emphasizing that declines in American stock indices, regardless of Israeli factors, signify a specific weakening of the shekel as there is an organic link between the two.

The Israeli central bank fears the strength of the shekel

Salama adds: "The Israeli central bank fears the strength of the shekel, which indeed may curb inflation, but it will lead to recession. Inflation is somewhat positive if its rate ranges between 1-2%, as it stimulates growth. However, a recession could lead to economic contraction, which is undesirable."

Salama noted a similar experience faced by the Japanese economy after 1994 when the yen enjoyed significant strength, and there was a necessity for intervention as excessive currency strength has negative economic impacts, such as contraction, limited growth, increased unemployment, a decrease in exports, and diminished demand in the economy, as personal consumption decreases because individuals will buy goods with lesser amounts of money. This harms the economy, which is why the Israeli central bank is inclined to lower interest rates, and if this coincides with several factors, including a decline in American stocks, the dollar's price could rise to exchange levels above 3 shekels, noting that the current ceiling of the dollar's exchange rate against the shekel is 3.28 at its peak and 2.90 at its bottom, hence it could rise above these exchange levels if a series of factors are available.