The U.S. dollar has climbed back above the 3-shekel mark for the first time since late April, reversing months of shekel strength amid weakness in global AI and semiconductor stocks, heightened regional tensions, and growing expectations that the Bank of Israel will soon cut interest rates.

According to a report by N12, the shift in the currency markets has been driven by a combination of factors, including a sharp decline in technology shares worldwide, rising security concerns in the region, and forecasts that the Bank of Israel will lower its benchmark interest rate again next week.

One of the primary reasons for the shekel’s strong performance in recent months had been a steady inflow of U.S. dollars from major technology companies operating in Israel. A report by Leader Capital Markets noted that Mellanox, Nvidia’s Israeli subsidiary, exports products on a large scale and regularly converts substantial amounts of dollars into shekels to pay taxes in Israel—a process that strengthens the local currency.

That trend, however, reversed last week. The global SOX semiconductor index fell by approximately 8%, while weakness spread throughout AI-related stocks in markets across Asia and Israel. Tel Aviv’s Technology Index dropped 2.47% on Friday, with the technology sector’s decline contributing to the weakening of the shekel.

The Israeli currency also lost ground against a broader basket of foreign currencies, suggesting that geopolitical concerns are playing a significant role. Ongoing tensions between the United States and Iran, the security situation in Lebanon, and fears of continued regional instability have prompted investors to demand a higher risk premium for holding shekels.

For Israeli consumers, a stronger dollar is most noticeable in expenses tied to the U.S. currency, including airline tickets, overseas vacations, purchases from international online retailers, and certain imported goods. The impact on retail prices within Israel, however, is not expected to be immediate and will depend largely on importers’ pricing policies and future currency movements.

Attention is now turning to next week’s interest-rate decision by the Bank of Israel. Many economists expect the central bank to lower its benchmark rate by a quarter of a percentage point, from 3.75% to 3.5%. At the same time, the recent rise in the dollar could make policymakers more cautious, since a weaker shekel tends to increase import costs and place additional upward pressure on inflation.

Beyond the rate announcement itself, investors will be closely watching the Bank of Israel’s updated economic outlook. Markets are eager to see whether the central bank signals a clear path toward additional rate cuts or opts for a more cautious approach in light of ongoing security uncertainty, the government’s budget deficit, and continued volatility in financial markets.

{Matzav.com}