The Shekel Is at a 25 Year High Against the Dollar–What This Means for Israel's Economy

The shekel has risen to a 25 year high against the dollar on growth in Israel’s economy and its rebound from Covid-19. On the face of it, this seems like excellent news and an indicator of a robust economic recovery.

However, a strong shekel is not good news for all Israeli investments and segments of the economy. Tech companies and workers who get paid in dollars are facing headwinds as well as Israeli exporters who see a strong shekel as a factor in making their goods less competitive in the international market.

The Bank of Israel has periodically purchased American dollars and euros to bolster these currencies and there is talk of the possibility of the Bank of Israel tightening rates in its late November meeting. The strong shekel is an advantage and a drawback, depending on one’s vantage point, but it nonetheless is a sign of economic strength and that now is a good time to invest in Israel.

Why Is the Shekel So Strong?

There are a number of factors that account for the rise of the shekel. The pandemic is the most obvious culprit and in the early days of COVID-19, the dollar dropped from its more accustomed level of 3.5 and fluctuated between 3.3 and 3.2 for most of 2020.

Recently, the dollar fell to a 25-year low against the shekel in early November  of 2021, and in one day, dropped all the way down to 3.08 against the shekel before closing at 3.11. One reason for this divergence in the performance of the shekel versus the dollar is that, in general, Israel’s economic recovery from COVID has been stronger than that of the U.S.

Although the various waves and the Delta variant hit Israel hard over the summer, a far-reaching vaccination campaign stemmed the tide of infections and prevented additional lockdowns which in 2020 had a deleterious effect on the economy.

If the Israeli tech industry pays part of the price for the strong shekel, it is partly a victim of its own success. Inward Israeli investment from acquisitions and fund raises increases the demand for shekels. In a year of record-breaking fundraises for Israeli startups, a stronger shekel is a natural consequence.

The Bank of Israel has been slower in buying foreign currency than in past years, but it is expected to renew its purchases. In addition, there is some expectation of a rate hike by the Bank of Israel from 0.1% to 0.25. This is not a certainty, but this move could tame the shekel.

The Positives of a Strong Shekel

A strong shekel is an impressive reflection on economic growth and can be an encouragement to invest in Israel. Although the strength of the currency may hobble exporters, the cause rather than the effect of a robust shekel is a positive.

A solid shekel bolsters the buying power of Israeli consumers and importers. The average Israeli may find that they can purchase more when ordering from abroad or traveling. In addition, Israeli consumers may feel more satisfied with their wages knowing they can buy more on eCommerce sites based abroad.

The Negatives of a Strong Shekel

The negative aspects of a strong shekel are felt keenly among fixed-income Anglo-Israeli retirees living on Social Security and investments, Israel-based remote workers who are paid by American companies in dollars, tech companies, and exporters. A powerful shekel makes Israel-produced goods less competitive in foreign markets.

Many talented Israeli tech engineers may have to charge more to pay their expenses in shekel and can be price themselves out of the market. Israeli tech companies can be harmed by the strong shekel, especially if they are getting funding or are being paid in dollars.

Could the Shekel Get Weaker Against the Dollar?

Many in the tech industry and exporters are calling for the Bank of Israel to take measures to rein in the shekel through massive purchases of foreign currencies, especially dollars, as they have in the past. The Bank of Israel will announce its policy on interest rates in late November.

However, as Globes reports, The Bank of Israel may not feel pressure to raise rates. Inflation is relatively low in Israel and the inflation that exists is considered as a temporary result of supply issues. Israeli consumers are happy with their purchasing power and a rise in rates could lower consumer confidence. In addition, Israeli exporters have confounded expectations and many continue to thrive despite the strong shekel.

The bottom line is that there is a case to be made for the Bank of Israel to raise or keep rates steady in late November, and there is no certainty which course of action it will take.

The Shekel and Israeli Investments

Whether the shekel is positive or negative, and the case can be made for either position, it is certainly a sign of a growing economy. As an indicator of strength, the power of the shekel can help Israeli investments and be yet another solid reason to invest in Israel.

Invest in Israel with the Jerusalem Portfolio

The Jerusalem Portfolio is comprised of a fractional interest in 100 Israeli companies through a portfolio of professionally managed  ETFs. You can give the gift of the Jerusalem Portfolio for as little as $180. The recipient will be given a plaque with a beautiful and customized image of Jerusalem. Talk to our experts today about giving the Jerusalem Portfolio to a special young person as a bar or bat mitzvah gift, birthday, graduation, or other occasions.