The dollar has reached a six-month high against the shekel. What is driving the move?
Global dollar strength explains only a fraction of the shekel’s depreciation. The rest appears to reflect domestic pressures that conventional market indicators have yet to fully capture.
The dollar surged to approximately NIS 3.17 on Tuesday, its highest level since March 31, 2026, after falling to a low of just NIS 2.95 on August 17. That represents a 7.1% depreciation of the shekel in less than three months.
The first question is whether the dollar is strengthening against currencies worldwide or whether the shekel itself is weakening. One way to distinguish between the two is to compare the shekel with a basket of currencies belonging to Israel’s trading partners. On that basis, the shekel’s depreciation narrows to 5.3%. The 1.8-percentage-point difference reflects the dollar’s global strength rather than weakness specific to the shekel.
In other words, only about a quarter of the exchange-rate movement can be attributed to the dollar’s broader appreciation. Roughly three-quarters of the story lies on the shekel’s side. The 5.3% decline against the currency basket is therefore a domestic phenomenon that requires an explanation rooted in the Israeli economy. This is where the process of elimination begins: stripping away the possible explanations brings us closer to the core of the story.
The first factor many are quick to cite is the current account. But the figures suggest it does not explain the recent depreciation. The current account measures the net flow of goods, services and income between Israel and the rest of the world. It includes trade in goods and services, as well as interest and dividend payments between Israeli and foreign investors.
It is the latter component, known as primary income, that has changed, rather than the trade balance. In the first and second quarters of 2026, Israel’s current account moved into deficit, driven by a surge in the primary income deficit to approximately $7.8 billion per quarter, the highest level ever recorded. This reflects record profits generated by foreign companies operating in Israel, particularly in the high-tech and AI sectors.
As these companies become more profitable, the dividends owed to their foreign shareholders increase. Such payments are recorded as an outflow of income from Israel. However, approximately 72% of these profits are not distributed but reinvested in the companies themselves. Those reinvestments are recorded as inflows in the financial account. In cash-flow terms, therefore, the corresponding funds are not necessarily leaving Israel. The Bank of Israel’s foreign currency reserves, in fact, increased in both quarters.
This suggests that at least part of the apparent deterioration in the current account reflects an accounting shift between different parts of the balance of payments, rather than an equivalent outflow of dollars. Timing is another problem with this explanation. After two consecutive quarters of current-account deficits, the shekel reached its strongest point in mid-August, around the middle of the third quarter. A current-account deficit can put gradual pressure on a currency, but it does not readily explain a sharp depreciation of 7% immediately after the currency has reached a peak.
The second factor is the decline in stock markets. According to a model developed by Dr. Gil Bufman, formerly chief economist at Bank Leumi, an analysis of the shekel’s depreciation over the past month, which exceeded 3%, suggests that slightly more than one percentage point was attributable to declines on Wall Street, primarily in the Nasdaq. Another approximately 0.6 percentage points came from the Tel Aviv 35 index. Together, the declines in Israeli and U.S. equities explain only about half of the shekel’s depreciation.
The mechanism is well established. When the value of foreign equities held by Israeli institutional investors falls, those investors may need to adjust their currency hedges, prompting them to buy dollars. This creates genuine pressure on the shekel. But while the effect is real, it accounts for only part of the decline.
The third component, the risk premium, has moved in the opposite direction. Credit default swaps (CDS), which function as insurance against a country's failure to meet its debt obligations, currently stand at approximately 61 basis points. They have declined by 0.9% over the past month and by 5.1% over the past three months. In other words, while the shekel has weakened by around 3% over the past month, the market measure of Israel’s sovereign risk has fallen rather than risen.
Over the year as a whole, Israel’s risk index has declined by approximately 14%. The market has therefore been pricing in less risk, not more, even as the currency has weakened. Only on Tuesday was there a single-day jump of approximately 3%, perhaps an early indication that this picture is beginning to change. The yield differential against global benchmarks has also remained unchanged. Two of the main channels that would normally help explain a currency depreciation are therefore largely absent.
This brings us to the central question. According to Bufman, standard exchange-rate models can generally replicate currency movements with considerable accuracy using a relatively small number of variables, including stock-market performance, risk spreads and interest-rate differentials. When an unexplained residual remains, accounting for between one-third and one-half of the movement, it points to forces outside the variables captured by the model.
The most likely explanation, according to this analysis, is political and security-related uncertainty in both Israel and the United States. Such uncertainty may not yet be reflected in stock prices or CDS spreads, but it could already be weighing on the shekel. The foreign-exchange market is highly liquid and reacts quickly to new information, making it one of the first places where investors express concerns that have yet to show up elsewhere.
Several forces may be converging through this channel. Whether the trigger is a decline in stock prices or a geopolitical concern, the pressure ultimately reaches the shekel through the foreign-exchange market. Reports of a possible resumption of conflict with Iran, amid pressure from Netanyahu on Trump, and uncertainty over how Trump may respond to the results of the U.S. congressional elections could add to that pressure.
But because this explanation rests on an unexplained residual, it should be treated with caution. The real test will come in the weeks ahead. If the shekel’s weakness reflects a genuine increase in perceived risk, CDS spreads and stock markets may eventually move in the same direction, reflecting the greater uncertainty already implied by the exchange rate. If, by contrast, CDS spreads continue to decline while the shekel keeps weakening, the divergence will become one of the biggest puzzles facing Israel’s foreign-exchange market.
