The dollar below NIS 2.8: these are 4 scenarios that can stop the decline

High-tech companies, responsible for more than half of Israeli exports, find themselves in difficulties: their revenues in dollars are eroded when translated into shekels, wage costs denominated in shekels remain unchanged, and profitability evaporates. In industry, the pressure on the treasury and the Bank of Israel to act is increasing.

So what, after all, can change the direction and lead to a depreciation of the shekel? Here are four scenarios that are discussed in the markets – with varying levels of probability – some are optimistic, and others involve a price that no one wishes for.

1 Wall Street is going into a tailspin

The force behind the appreciation of the shekel in the past year is not geopolitical but rather financial: the Israeli pension funds, provident funds and insurance companies hedge their exposure to foreign markets, and sell dollars in unprecedented volumes.

This is how it works: the institutions maintain a fixed level of exposure to foreign currency – about 20% on average. Since a huge part of the public’s money is invested in stocks overseas, an automatic mechanism is created here: every time the US stock markets rise, the value of the dollar-denominated shares of the institutions soars – which threatens to raise their percentage of exposure to foreign exchange beyond the target they set. In order to balance the picture and maintain a stable level of exposure of about 20%, the institutions are forced to act in the opposite way, and sell dollars in the market.

In the bottom line, every increase of only 1% in the leading indices on Wall Street requires the institutions to sell, according to estimates, about 1.5 billion dollars to hedge the risk. This constant selling pressure is flooding the domestic market with dollars, and more so recently, when since the end of March, the S&P 500 and Nasdaq indices have risen by double-digit rates.

But what will happen in the opposite situation, where the American market changes direction and goes into a sharp correction? “Sharp declines in the stock markets, abroad in general and in the US in particular, this can be a significant trigger,” says Yonatan Katz, Chief Economist at Leader Capital Markets. “If we see relatively sharp declines, let’s say 20%, something we’ve seen before with Trump’s tariffs in April of last year – you can see the shekel reaching 3.15-3.2 to the dollar.”

A possible background for such a scenario would be the acceleration of inflation in the US, an increase in long-term bond yields, and the Fed raising interest rates contrary to expectations – processes that in the last two weeks have begun to become tangible, but not yet in a dramatic way. Katz sees this scenario, in a year’s time, as the most reasonable of all.

But it won’t end there. The hedges of the institutions, which are currently boosting the shekel and pushing inflation down, can also work in the opposite direction. A fall in the stock markets may lead to a weakening of the shekel, but it will come at the cost of increasing inflationary power due to the volume of dollar purchases that will be required from the institutions.

2 Israel’s risk premium is rising again

The decrease in the Israeli risk premium is one of the factors that attracted investors to return to Israel and return funds to it. This decrease is evident in the CDS index (insurance on credit risks), which has fallen by more than 60% since it broke records in October 2024, against the background of the escalation in the North at the time. Reversing this trend is possible mainly in extreme cases, after the Israeli economy has already demonstrated resilience in the last rounds against Iran, which did not increase the risk premium as it is expressed in CDS over time.

According to market estimates, a real escalation is required that will change the perception of risk by both foreigners and the Israeli public: not another “Roar of Harry”, but horror scenarios that rekindle the fear of long-term stability.

3 Aggressive intervention by the Bank of Israel

This is one of the scenarios in the control of the policy makers, but at the moment there are no signs that they will want to take advantage of it. This week the Bank of Israel reduced the interest rate by a quarter of a percent to 3.75%, a move that was hardly felt in the dollar exchange rate.

Modi Shafferer, chief financial markets strategist at Bank Hapoalim, estimates that another moderate interest rate cut will not be enough to create an impact: “We need to cut relatively sharply, not moderately, in order to see a trend reversal. In addition, foreign exchange purchases by the central bank can moderate the appreciation of the shekel and curb the trend, but it depends on what scope they reach, if in the end the Bank of Israel decides to intervene.”

In other words, the tools of interest and dollar purchases in the hands of the bank’s governor, Prof. Amir Yaron, may be effective, but only if they are used decisively.

There is already a precedent for this from recent years, under the same governor. At the beginning of 2021, the Bank of Israel announced a plan to purchase 30 billion dollars, and in practice purchased about 35 billion dollars – an unusual action that halted sharp appreciation. As Yonatan Katz points out, the justifications given then for intervention – a current account surplus, direct investments in high-tech, and massive foreign exchange sales by institutions – are almost exactly the same as today’s circumstances. The difference is that then interest rates were close to zero and the Corona crisis was a global event. Today, the Bank of Israel shows hesitation.

However, there are those in the market who question the effectiveness of this type of intervention. The reason is that the massive increase in the assets managed by the institutions in recent years, against the background of the sharp increases in the stock markets, resulted in the effect of the hedges becoming much more dramatic, which reduces the power of the central lever of the Bank of Israel. In addition to this, the governor himself signaled this week after the interest rate decision that he does not intend to use the purchase of dollars at this stage, nor did he define a threshold at which the approach would change.

The institutions manage a portfolio of assets twice as large as they managed in 2021. In order for the Bank of Israel to really have an effect, it will itself have to invest much larger sums than before. It can be assumed that in light of the market power of the institutions, and the fact that the foreign exchange balances of the Bank of Israel already stand at approximately 236 billion dollars, this time 35 billion dollars will no longer be enough.

Shafferer points out another factor that may operate anyway, without any intervention: “If you look only at the interest rate differentials – the shekel has already strengthened too much, due to the fundamental forces and the foreign exchange sales of the institutions.” That is, the pure financial forces, without any announcement, may at some point rebalance.

4 The treasury will define its foreign currency debt, another idea outside the box

There is also a theoretical scenario, which is in the hands of the Ministry of Finance, which seems not interested in its implementation: hedging the foreign currency debt of the country while taking advantage of the strengthening of the shekel. “The General Accounting Division, which among other things issues dollar bonds abroad, can hedge and actually buy dollars at a low rate,” says Alex Zebzinski, chief economist at Meitav Investment House. “In this way, the Treasury is actually injecting demand for dollars through the derivatives market.” According to him, “any business company that issues a loan in foreign currency and sees that the shekel is strengthening, at least the Treasury can look into it.”

The reason the Treasury is hesitating, according to Zabrzynski, is twofold: on the one hand, it does not want to be perceived as a “speculator” who changes debt management policy. On the other hand, he is afraid that he will come to the market with billions and finish the closing at a bad rate.

Around the Treasury’s resistance and the Bank of Israel’s avoidance of aggressive intervention, Zabzinski had an idea for an integrated mechanism that would allow all parties to act without being exposed. According to it, the Bank of Israel will establish a mechanism through which the institutions sell dollars to it directly – instead of “throwing” them into the open market. The central bank, which does not want to accumulate a large foreign exchange exposure, transfers them to the Treasury, which quietly closes its foreign loans. “This way, the hedging flow of the institutions does not pass through the market and the Treasury closes foreign exchange exposure at a good rate,” Zabrzynski concludes. “It requires everyone to adapt and agree – but this is a national task.” He also mentions the alternative price, if no active step is taken and the state lets the market forces do their thing: “wait for factories to close here, high-tech will suffer, there will be a recession and then the shekel will weaken.”