The shekel-dollar rate is three point zero five as of this morning, and every headline you read is about whether it breaks below two point nine. But here's what almost nobody's talking about — Israel does more than sixty percent of its export trade with Europe and Asia, not the United States. And right now, the shekel has weakened eight percent against the euro since January while strengthening three percent against the dollar. That divergence is the real story, and it's reshaping who wins and who loses in the Israeli economy right under the surface.
This isn't some minor wobble — it's a structural divergence in how the shekel trades against different currency blocs, and it's been building since the start of twenty twenty-five. The euro-shekel pair moved from three point eight five to four point one five in about seventeen months. That's a nearly eight percent depreciation of the shekel against the euro. Meanwhile, the shekel-dollar pair tightened from three point seven to three point zero five — about a seventeen percent appreciation. These are massive, opposite-direction moves happening simultaneously.
The shekel is simultaneously strong and weak, depending on which border you're looking across. That's the kind of thing that makes your average business reporter's head explode, which is probably why they just keep writing about the dollar rate.
They do, and it drives me slightly crazy because the Bank of Israel doesn't even watch the dollar rate as its primary metric. They watch something called the effective exchange rate index — it's a trade-weighted basket of twenty-six currencies, and the dollar is only thirty-two percent of that basket. The euro is twenty-eight percent, the pound is twelve percent, the yen is eight percent, the Chinese yuan is seven percent, and the Canadian and Australian dollars together are about nine percent. So when you're staring at USD-ILS, you're looking at less than a third of the picture.
Let's define that effective exchange rate properly, because I think most people hear "trade-weighted basket" and their eyes glaze over. What's actually in it, and why does the Bank of Israel care more about it than the dollar?
The effective exchange rate — or the nominal effective exchange rate, the NEER — is basically a weighted average of the shekel against all the currencies of Israel's major trading partners. The weights are updated annually based on actual trade volumes. So if Israel exports thirty percent of its goods to the eurozone, the euro gets roughly a thirty percent weight. The Bank of Israel publishes this index weekly, and as of April it was sitting at about one hundred and twelve, using twenty fifteen as the base year of one hundred. The ten year average is about one hundred and seven. So on a trade-weighted basis, the shekel is about five percent overvalued relative to its long term average — but that single number is hiding the wild internal divergence.
Overvalued on average, but the average is kind of a lie in this case.
The average is doing a lot of work. You've got the shekel at near-record strength against the dollar, significant strength against the Canadian and Australian dollars, but notable weakness against the euro, the pound, and the yen. The effective rate is an average that smooths out a very lumpy reality.
Let's run the numbers on the five major crosses. Where has each pair moved since January twenty twenty-five, and what's driving the divergence?
Let me lay them out. Euro-shekel: moved from about three point eight five in January twenty twenty-five to four point one five as of mid-May twenty twenty-six — that's a seven point eight percent depreciation of the shekel against the euro. Pound-shekel: from four point five to four point seven two, about four point nine percent weaker shekel. Now flip to the commodity currencies. Canadian dollar-shekel: from two point six five down to two point five eight — the shekel actually strengthened about two point six percent against the loonie. Australian dollar-shekel: from two point three five to two point two eight, shekel up about three percent. And then the yen-shekel: from two point four to two point five five — the shekel weakened about six point three percent against the yen, though that's measured in yen terms so the direction can be counterintuitive.
Three currencies where the shekel is weakening, two where it's strengthening, and the magnitudes are all over the place. What's actually causing this?
Three separate drivers, and they're all about what's happening outside Israel. First, the euro and pound story: the European Central Bank held rates steady through most of twenty twenty-five while the Federal Reserve cut three times. That interest rate differential made euro-denominated assets more attractive relative to dollar assets, and since the shekel has historically tracked the dollar pretty closely, the euro strengthened against both the dollar and the shekel simultaneously. The Bank of England did something similar — held firm while the Fed eased, so sterling gained ground.
The shekel's euro weakness is really a dollar weakness story spilling over?
The shekel tends to move with the dollar in the short run because Israel's monetary policy often shadows the Fed, and because so much Israeli trade and investment is dollar-denominated. When the dollar weakens against the euro, the shekel often weakens against the euro too, even if the shekel-dollar rate itself doesn't move much. But there's a second driver with the commodity currencies — Canada and Australia. Both benefited from China's stimulus package in late twenty twenty-five, which boosted demand for iron ore, copper, natural gas, and agricultural products. The Canadian and Australian dollars strengthened against a broad basket, including the shekel. But here's the twist: the shekel strengthened against those currencies anyway because Israel's own fundamentals — strong tech exports, high foreign reserves, relatively high interest rates — pulled capital inflows that overwhelmed the commodity story.
The shekel is strong enough to beat the commodity currency tailwind but not strong enough to beat the euro rate differential. That's a very specific Goldilocks position.
Then there's the yen, which is its own strange animal. The Bank of Japan finally shifted policy in March twenty twenty-six — raised rates out of negative territory and signaled more hikes to come. That triggered a partial unwind of the yen carry trade, where investors had been borrowing yen at near-zero rates to invest in higher-yielding currencies like the shekel. As the carry trade unwound, the yen strengthened, and the shekel weakened against it by over six percent.
Three completely different mechanisms producing three different trajectories. And the Bank of Israel is sitting in the middle of this trying to manage one exchange rate that doesn't actually exist.
That's the dilemma in a nutshell. The Bank of Israel can intervene in the dollar-shekel market — and they have been, aggressively. In April alone, they spent three point two billion dollars of foreign exchange reserves defending the shekel, trying to keep it from strengthening past that three point zero line against the dollar. Their total reserves hit two hundred and eighteen billion dollars, up from two hundred and twelve billion at the end of twenty twenty-five. But here's the thing: when the Bank of Israel buys dollars to weaken the shekel against the dollar, that operation has spillover effects on every other cross-rate, and those effects aren't always what they want.
Walk me through the spillover. If they're buying dollars to push USD-ILS up, what happens to EUR-ILS?
When the Bank of Israel buys dollars, they're increasing the supply of shekels in the market and increasing demand for dollars. That mechanically weakens the shekel against the dollar — that's the intended effect. But it also increases the overall supply of shekels, which tends to weaken the shekel against everything, including the euro. So an intervention aimed at the dollar pair actually amplifies the shekel's weakness against the euro, which might not be desirable if European imports are already feeding inflation. It's a blunt instrument being applied to a surgical problem.
They're trying to put out a fire in the dollar market and inadvertently dumping gasoline on the euro market.
That's not far off. And the cross-rate effects are especially pronounced because the euro-dollar pair itself is moving. If the ECB is tightening or holding while the Fed is cutting, the euro strengthens against the dollar. The Bank of Israel's dollar purchases might slow the shekel's appreciation against the dollar, but they can't stop the euro from strengthening against the dollar, which means the euro-shekel rate keeps rising regardless of what Jerusalem does.
This is where the real economy starts feeling it. You mentioned this competitiveness wedge — exporters to Europe suddenly have an eight percent advantage they didn't have eighteen months ago.
Let me put some numbers on that with a concrete example. Teva Pharmaceuticals — Israel's largest exporter by revenue. They reported sixteen point eight billion dollars in revenue for twenty twenty-five. About sixty percent of that comes from Europe, roughly twenty percent from North America, and the rest from other markets. Now, when the shekel weakens eight percent against the euro, Teva's European revenue, when converted back to shekels for their Israeli operations, gets an eight percent boost — that's roughly an additional four hundred million dollars in shekel-equivalent revenue annually. But at the same time, their US revenue, converted at the stronger shekel-dollar rate, loses about a hundred and fifty million dollars in shekel terms. Net-net, Teva comes out about two hundred and fifty million dollars ahead on currency effects alone.
That's real money, even for a company that size. But not every Israeli exporter has Teva's geographic mix.
Right, and that's where the competitiveness wedge gets interesting. Take ICL — Israel Chemicals, the fertilizer and specialty minerals company. They have significant mining operations in Canada and Australia, and they sell into commodity markets priced in those currencies. The shekel has strengthened about two and a half percent against the Canadian dollar and three percent against the Australian dollar. So for ICL, their Canadian and Australian revenue, when repatriated to Israel, buys fewer shekels. Their margins are getting squeezed from the commodity-currency side, even as the broader "weak shekel" narrative suggests exporters should be thriving.
"the shekel is weak and that's good for exports" is false if your exports go to Canada, and "the shekel is strong and that's bad for exports" is false if your exports go to Europe. The narrative is just broken when you disaggregate.
And it gets even more fractured when you look at Israel's tech sector, which is the real engine of the economy. About seventy percent of Israeli tech exports are services — software development, R and D outsourcing, SaaS platforms, cybersecurity consulting. These are overwhelmingly priced in US dollars. Israeli startups raise funding in dollars from American venture capital firms, they sign contracts in dollars with American and global clients, and then they pay salaries in shekels to engineers in Tel Aviv and Herzliya.
The dollar-shekel rate is everything to them, and the euro-shekel rate is basically irrelevant.
When the shekel strengthens from three point seven to three point zero five against the dollar, every dollar of revenue those startups earn converts to fewer shekels. Their revenue in shekel terms shrinks by about seventeen percent, but their costs — salaries, office rent, everything local — stay fixed in shekels. That's a direct margin compression. For a startup burning cash and trying to extend its runway, that seventeen percent swing can be the difference between reaching the next funding round and running out of money.
Meanwhile, the euro-shekel move is a non-event for them because they're not selling into Europe in euros. So you've got this bizarre situation where Israel's most dynamic sector is being punished by currency moves that don't even register on the European side of their business.
The asymmetry cuts both ways. A traditional manufacturing exporter selling goods to Germany is having a great year because of the euro-shekel move, but they're probably not a tech company, they're not the ones driving Israel's GDP growth or its stock market valuations. The currency regime is effectively taxing the growth sector and subsidizing the traditional sector, and that's not a deliberate policy choice — it's an accidental byproduct of a monetary system that can only target one exchange rate at a time.
Let's talk about what this means for inflation, because that's where every Israeli consumer feels these moves whether they know it or not.
The inflation channel is where the cross-rate divergence really hits home. Israel imports different things from different currency zones. From Europe, Israel imports machinery, vehicles, pharmaceuticals, and high-end manufactured goods — things like German cars, Italian industrial equipment, Swiss pharmaceuticals. When the shekel weakens against the euro, all of those imports become more expensive in shekel terms. From the United States, Israel imports technology components, energy products, and agricultural commodities. When the shekel strengthens against the dollar, those become cheaper.
European-sourced inflation is rising, American-sourced inflation is falling, and the net effect depends on what share of the consumer basket each represents.
The Bank of Israel's own analysis, and this is from their April inflation report, suggests the net CPI impact of the cross-rate divergence is about plus zero point three percent for twenty twenty-six. The European import price increases are outweighing the American import price decreases, partly because Europe is a larger source of finished consumer goods for Israel than the US is, and partly because the euro move is larger in magnitude than the dollar move.
Zero point three percent doesn't sound catastrophic, but it's the direction that matters. It's an inflationary headwind at a time when the Bank of Israel is trying to bring inflation down toward its target range.
Inflation was already sticky. Israel's CPI was running at about three point one percent year-over-year as of April, above the Bank of Israel's one to three percent target band. The housing component has been especially stubborn. Add an extra zero point three percent from currency effects, and you're making the central bank's job measurably harder. They might have to hold rates higher for longer than they'd otherwise want, which feeds back into the exchange rate by attracting more capital inflows and strengthening the shekel further. It's a feedback loop.
What about tourism? That's a sector where the cross-rate effects are immediate and visible.
Tourism is a perfect natural experiment in exchange rate divergence because travelers from different countries are making decisions based on their own currency's purchasing power in Israel. European tourism to Israel is down about twelve percent year over year as of the first quarter of twenty twenty-six. The shekel is stronger against the euro than it was before the war, and European travelers are feeling it — hotels, restaurants, tours, everything is more expensive for them. Meanwhile, American tourism is up about eight percent because the dollar buys more shekels than it did a year ago.
The hotel in Tel Aviv is simultaneously too expensive for the German family and a bargain for the American family. Same room, same price in shekels, completely different value proposition depending on which passport you hold.
The tourism ministry's marketing strategy has to account for this. They're shifting promotional spending toward the US market and pulling back from Europe, which makes sense in the short term but risks losing European mindshare that took decades to build. Once European travelers get used to vacationing elsewhere, they might not come back even if the exchange rate eventually reverses.
Let's pull back to the longer-term competitiveness question. You mentioned the real effective exchange rate — the REER — sitting at one twelve versus a ten year average of one zero seven. What does that actually tell us about where the shekel is headed?
The REER adjusts the nominal effective exchange rate for inflation differentials. If Israel's inflation is higher than its trading partners', the REER rises even if the nominal rate doesn't move, because Israeli goods are becoming relatively more expensive in real terms. A REER of one twelve means Israeli goods and services are about five percent more expensive, on a trade-weighted basis, than their long-term average relative to competitors. That's a competitiveness loss. Historically, when Israel's REER has gotten above one ten, it's eventually corrected — either through nominal depreciation or through a period of lower Israeli inflation relative to trading partners.
"eventually corrected" can mean a lot of different things depending on how it happens.
That's where the scenario analysis gets interesting. There are really two paths this could take, and they have very different implications. Path one: the euro weakens. The ECB has been signaling that a rate cut is possible in June twenty twenty-six. If they cut and the Fed holds, the euro could weaken against the dollar, which would pull the euro-shekel rate back down. That would ease the imported inflation pressure from Europe, which the Bank of Israel would love, but it would also erase that eight percent competitiveness advantage that European-facing exporters have been enjoying.
The manufacturers who've been quietly celebrating the euro windfall would see it evaporate.
And path two: the dollar strengthens. If the Fed signals that rate cuts are off the table for the rest of twenty twenty-six, or if there's a flight to safety because of geopolitical developments — and we have plenty of those — the dollar could strengthen broadly. That would push the shekel-dollar rate back up toward three point two or three point three, which would be a relief for the tech sector but would also make dollar-denominated imports more expensive.
There's a third scenario you haven't mentioned — what if the shekel just weakens broadly against everything? A domestic shock that pushes all the crosses higher simultaneously.
That's the tail risk scenario, and it's not impossible. A significant escalation in the north, a political crisis that spooks foreign investors, a credit rating downgrade beyond what's already happened — any of those could trigger capital outflows that weaken the shekel across the board. In that scenario, the exporters would benefit across all currency pairs, but the inflationary consequences would be severe because import prices would rise from every direction at once. The Bank of Israel would face the nightmare choice of raising rates to defend the currency and fight inflation, which would crush domestic demand, or letting the shekel slide and accepting higher inflation.
The central bank's toolkit just isn't designed for a world where the shekel moves in opposite directions against different currencies. They've got one policy rate and one intervention currency, and that's the dollar.
That's the structural limitation. The Bank of Israel could, in theory, intervene in the euro-shekel market directly — they hold euro reserves, about twenty percent of the total reserve basket is in euros. But they've never done it at meaningful scale, and the euro-shekel market is less liquid than the dollar-shekel market, so intervention would be less efficient and more visible. They'd be telegraphing their moves in a way that invites speculative pressure.
They're stuck with a dollar-centric intervention strategy in a multi-currency world. That feels unsustainable.
It's manageable as long as the cross-rate divergences are modest, but the current environment is testing the limits. And there's a longer-term structural shift that's going to make this even more challenging — Israel is actively diversifying its trade toward Asia. The Abraham Accords opened up new trade corridors, India is becoming a major partner, China is already Israel's third largest trading partner after the US and EU. As those trade shares grow, the yen, the yuan, and the rupee become more important to Israel's effective exchange rate.
The Bank of Israel's current basket already includes the yuan at seven percent and the yen at eight percent. How much bigger could those get?
The yuan weight has doubled in the past five years, from about three and a half percent to seven percent. If current trade growth trends continue, it could hit twelve to fifteen percent within five years. At that point, the Bank of Israel would face a serious question about whether to add the yuan to its active intervention toolkit — holding more yuan reserves, potentially even establishing a swap line with the People's Bank of China. That's a geopolitical decision as much as a monetary one, and it's not one any Israeli central banker wants to make lightly given the US relationship.
The US security relationship versus the Asian trade reality. That tension is going to define Israeli economic policy for the next decade.
It already is, quietly. The Bank of Israel's reserve composition has been shifting — they've reduced the dollar share from about sixty-five percent to around sixty percent over the past few years, while increasing allocations to the yen, the Australian dollar, and the Canadian dollar. It's a gradual diversification that doesn't make headlines but reflects a clear recognition that the dollar-centric framework is inadequate.
Let's bring this back to the listener who's trying to make decisions based on all of this. What should a business owner or an investor actually do with this information?
Three concrete things. First, if you're an exporter to Europe, lock in current euro-shekel rates with forward contracts. You've got an eight percent tailwind right now that may not last. If the ECB cuts rates in June, the euro could weaken, and that advantage shrinks. Forward contracts let you secure today's rate for deliveries six or twelve months out. Don't get greedy waiting for four point three or four point four — hedge at least a portion of your expected euro receivables now.
If you're an importer from the US?
Delay dollar-denominated purchases if you can. The shekel is near historic strength against the dollar, and every shekel you spend today buys more dollars than it likely will six months from now, especially if the Bank of Israel's intervention eventually succeeds in pushing USD-ILS back up. If you have to buy now, at least don't hedge — you want to benefit from any further shekel strengthening, not lock in a rate that might get worse.
For investors with Israeli exposure, stop thinking about the shekel as a single-currency story. If you're hedging Israeli equity or bond positions, a basket approach is essential. Don't just short the dollar against the shekel — you need to consider the euro, the pound, and increasingly the yen and yuan as well. The effective exchange rate index is your benchmark, not USD-ILS. And pay attention to the divergence between the nominal and real effective rates — when the REER is above one ten and the NEER is below one zero five, that's a signal that inflation differentials are driving the competitiveness loss, and that usually corrects through nominal depreciation eventually.
Track the Bank of Israel's effective exchange rate index. It's published weekly on their website, and it's the single best summary statistic for where the shekel actually stands. Watching only the dollar rate in this environment is like checking the weather by looking at one window and ignoring the other three. The index gives you the weighted picture, and the subcomponents — especially the euro and yen crosses — tell you where the pressure points are building.
The actionable summary is: European exporters hedge now, US importers delay, and everyone should be watching the effective rate not the dollar headline.
If you're just a regular person trying to decide whether to book a vacation in Europe or the US, the answer right now is book the US trip. Your shekels go further.
Unless you're exporting avocados to Germany, in which case book the European sales meeting.
The agricultural export angle is actually a perfect microcosm of the whole dynamic. Israeli avocado, date, and herb exporters to Europe have gotten an eight percent price advantage in European supermarkets. But shipping costs and phytosanitary compliance eat about half of that. So the net benefit is closer to four percent — real, but not transformative. And it's fragile. A single ECB rate decision could wipe out half the advantage overnight.
This pattern of the shekel being strong against the dollar but weak against the euro isn't unprecedented, is it? You mentioned the twenty fourteen to twenty sixteen period.
Very similar setup. From twenty fourteen to twenty sixteen, the shekel traded between three point eight and four point zero against the dollar — strong by historical standards — but the euro was even weaker because of the European debt crisis aftermath and ECB quantitative easing. The euro-shekel rate was around four point five to four point eight. Israeli manufacturers restructured toward European markets during that period because the competitiveness math favored Europe, and we're seeing the same pattern re-emerge now.
That restructuring has lasting effects. Once you build the European distribution network and the customer relationships, you don't abandon them when the exchange rate shifts back.
That's the hysteresis effect in trade. Exchange rate moves have persistent impacts on trade patterns because there are fixed costs to entering new markets. Companies that pivoted to Europe in twenty fourteen through twenty sixteen stayed there even when the euro strengthened later. The current divergence is reinforcing that European orientation for Israeli exporters, and that's going to shape trade patterns for years, regardless of what the ECB does in June.
The exchange rate isn't just a price — it's a structural force that reshapes the economy's wiring over time.
The wiring is being reshaped right now in ways that most commentary is missing entirely because they're staring at the dollar rate. The shekel is not strong. The shekel is not weak. The shekel is both, and which one it is depends entirely on who you are and where you sell.
One last thread I want to pull — you mentioned the shekel-yuan cross becoming more important. Israel's trade with China has been growing fast, but it's also politically sensitive. How does the Bank of Israel manage a currency pair where the counterparty has capital controls and a managed float?
They largely don't, and that's the problem. The yuan is not freely convertible, so the shekel-yuan rate is really a synthetic cross derived from USD-ILS and USD-CNY. The Bank of Israel has no direct influence over it. As China becomes a larger trade partner, that lack of direct access becomes a bigger vulnerability. If the PBOC decides to devalue the yuan to boost Chinese exports — which they've done before — Israeli exporters to China get hammered, and the Bank of Israel can't do anything about it.
Adding the yuan to the reference basket is one thing, but actually being able to manage the shekel-yuan cross is a different problem entirely.
It's a problem that's going to require some creative diplomacy. A bilateral swap line with the PBOC would give the Bank of Israel access to yuan liquidity for intervention, but it would also create a financial link to China's monetary system that Washington might view dimly. Israel is going to have to navigate between its largest security partner and its fastest-growing trade partners, and the exchange rate mechanism is going to be one of the places where that tension plays out.
The quiet story of shekel cross-rates is really a story about Israel's place in a changing global economy — less tethered to the US, more exposed to Europe and Asia, and with a monetary toolkit that was built for a world that no longer exists.
The divergence we're seeing now — eight percent weaker against the euro, three percent stronger against the dollar — is not a temporary anomaly. It's a preview of the new normal. As Israel's trade patterns diversify, these cross-rate divergences are going to become more common and more pronounced. The Bank of Israel is going to need new tools, and Israeli businesses are going to need a much more sophisticated approach to currency risk than just watching the dollar.
The bottom line for anyone listening: the shekel is not one exchange rate, it's at least five that matter, and they're moving in different directions for different reasons. The headline number is misleading, the policy response is constrained, and the real economy is already adapting in ways that will outlast whatever the ECB decides in June.
If you want to stay ahead of this, the single best thing you can do is pull up the Bank of Israel's effective exchange rate index once a week and watch the components, not just the headline. The signal is in the cross-rates, and right now that signal is saying that Israel's competitiveness story is much more complicated — and much more interesting — than the dollar rate alone would suggest.
Now: Hilbert's daily fun fact.
Hilbert: In the seventeen twenties, coopers in the Azores developed a specialized adze with a slightly canted blade — offset by about seven degrees — designed specifically for shaping the interior curve of whale-oil casks. The word "adze" itself traces back to the Old English "adesa," which is of unknown origin but appears nowhere else in the Germanic language family, suggesting it may have been borrowed from a lost pre-Saxon toolmaking vocabulary.
A seven degree offset. For whale oil casks.
You know, I have questions about how Hilbert spends his afternoons.
Thanks to our producer Hilbert Flumingtop for that glimpse into the coopering subconscious. This has been My Weird Prompts. Find us at myweirdprompts dot com or wherever you get your podcasts. If you found this useful, leave us a review — it genuinely helps other people find the show. We'll be back next week.
