Bank of Israel reveals: What is driving the dollar
A Bank of Israel report shows that in the second quarter of 2026, the shekel defied global trends by strengthening against the dollar, even as the US currency gained ground elsewhere. This shift was primarily driven by massive foreign currency sales from institutional investors managing public savings.
According to a report published by the Bank of Israel, the second quarter of 2026 presented a foreign exchange market dynamic that is difficult to ignore: the shekel strengthened by 5.9% against the dollar, 6.6% against the euro, and 6.1% against the basket of currencies of Israel's main trading partners. This would be unremarkable if not for the simultaneous global trend.
During the same period, the US dollar strengthened against almost every other major currency, rising 2.3% against the Japanese yen and 2% against the Canadian dollar. In short, while global investors were flocking to the dollar, the opposite occurred in Israel. The shekel swam against the global current, a phenomenon highlighted in the Bank of Israel's report.
The primary force behind this movement was institutional bodies—pension funds, provident funds, and insurance companies that manage public savings. Their net foreign currency sales surged to $13.8 billion for the quarter, compared to $5.3 billion in the previous quarter, representing a 2.6-fold increase.
The reason is directly linked to investment portfolios. As foreign stock markets rise, dollar exposure within these portfolios increases, forcing institutional investors to sell dollars to balance their hedging. The volume of their activity is significant enough to shift the entire exchange rate.
Conversely, foreign investors made a sharp turn: after purchasing $6.5 billion in the first quarter, they switched to selling $6.4 billion. This represents a $13 billion swing in direction. The business sector also shifted, moving from a net buyer of dollars to a seller.
Amid this turbulence, the Bank of Israel intervened, purchasing approximately $1.8 billion net during the quarter. This was not a one-time action: in May, the bank purchased about $801 million—its first intervention in the foreign exchange market since 2022—and continued with another $1 billion purchase in June. The bank clarifies that these moves were made on a case-by-case basis to maintain regular market activity, rather than to fix a specific exchange rate.
A strong shekel erodes the value of foreign investments when converted back into local currency. Even if the S&P 500 performs well, part of that return is effectively "eaten" by the strengthening shekel when converted back into shekels within pension or advanced training funds (keren hishtalmut).
Furthermore, the Bank of Israel report reveals that volatility in the dollar-shekel exchange rate rose to an average of 10.7%. This level is more reminiscent of emerging market currencies than developed economies, where volatility has fallen to around 7%. Consequently, the shekel is trading with higher-than-usual volatility, affecting returns in ways that are not always immediately apparent.
