The dollar is just a supporting actor: what is really causing the shekel's appreciation
Since the beginning of the month, the shekel has strengthened against the dollar by 3%, trading again below 3 shekels. Experts attribute this trend not to the weakness of the US dollar, but to the fundamental forces of the Israeli economy.
Since the beginning of the month, the shekel has strengthened against the dollar by 3%, trading again below 3 shekels. The change in the prefix has brought the exchange rate issue back into the economic discourse after the Israeli currency became the strongest in the world over the past year, completing an appreciation of more than 20%.
This time, the story begins with the American currency itself. The DXY index, which compares the dollar to the currencies of the US's major trading partners, has lost about 1% in the last month, but it is still 1.4% higher since the beginning of the year. However, the Israeli story remains significant. The nominal effective exchange rate index — the "Israeli" DXY — has moved from 63.3 to 61 points, reflecting an appreciation of about 3.6% in three weeks.
The impact of national accounting data
According to the report, the economy grew in the second quarter of the year by 15.4% at an annual rate, significantly exceeding the consensus of just over 8%. However, a dive into the report shows that when net exports are neutralized — the part of the GDP that passed through Israel but was not produced here — the numbers are much lower.
A report published by J.P. Morgan proves this is not a new phenomenon. Production carried out by Israeli companies outside the country's borders explains about half of the GDP expansion in the last three years: 8.4% real growth since the second quarter of 2023, and excluding this component, only about 4%. JPM points to Nvidia-Mellanox as a prime example of this phenomenon.
Channels of influence on the exchange rate
The flow acts through three channels:
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The current account: receipts are recorded as exports in full, inflating the surplus.
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The capital account: foreigners are returning money to the economy as foreign direct investment (FDI).
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The fiscal channel: tax payments must be made in shekels, creating constant demand for the local currency.
Kobi Levi, head of the markets strategy desk at Bank Leumi, explains: "Pressures for the shekel's appreciation continue to stem from fundamental forces characterizing the Israeli economy. This includes the current account surplus thanks to the high-tech sector and the defense industry, as well as record-breaking capital account activity in 2026."
The role of institutional investors
Another element pushing the shekel upward is the activity of institutional bodies. According to Bank of Israel reports, they sold 40.5 billion dollars in the 12 months between the beginning of the third quarter of 2025 and the end of the second quarter of 2026. Of this, 13.8 billion dollars were sold in the second quarter of 2026 alone. As portfolios abroad grow, hedging rules require the sale of additional foreign currency regardless of the rate.
"The Bank of Israel's actions temporarily mitigated some of the pressures, but did not change the trend," emphasized Levi. Therefore, the decline in the dollar rate is less about the weakness of the American currency and more a result of an Israeli foreign currency machine that continues to produce dollars and sell them. As long as the machine is working, the long-term trend remains unchanged.
