Shekel strength supported by fundamentals but may reflect short-term overshooting

ISRAEL - In Brief 26 Jun 2025 by Sani Ziv

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Since the successful military operation against Iran, the shekel has strengthened by nearly 4.5% against the U.S. dollar, reaching its strongest level since the end of 2022. It has also been appreciated by 4.5% against the euro.Chart 1: ILS exchange rate vs USD, EUR, and nominal effective rateThe chart displays the shekel’s exchange rate against the U.S. dollar (USD), euro (EUR), and the nominal effective exchange rate (NER).The right axis shows the shekel exchange rate (NIS per dollar/euro); the left axis shows the currency basket index.It highlights a significant appreciation of the shekel since late 2024, with a particularly sharp rise in June 2025 following the military operation against Iran.Source: Bank of Israel; daily exchange rate data as of 25/6/2025; Why is the shekel rising against the dollar? It is clear that the shekel’s recent strength is closely tied to the improving security and geopolitical outlook for Israel. The success of the military operation against Iran with U.S. backing has created a cautious optimism among investors. We are seeing this reflected across markets: in the foreign exchange rate, in a sharp rebound on the Tel Aviv Stock Exchange, and in falling yields on long-term government bonds, all signs that the risk premium on Israel has declined. But the recent rally did not come out of nowhere. In fact, the shift toward a stronger shekel and improving sentiment began already in late 2024, after Israel’s offensive in Lebanon significantly weakened Hezbollah’s capabilities. That event marked a turning point in market perceptions, and since then, capital flows into Israel have picked up. The following charts show capital flows into Israel thro...