The rapid strengthening of the shekel against the dollar in Israel has shifted the exchange rate outlook, long considered a sign of economic resilience, to a new dimension. The rising value has turned into profit pressure for exporting companies and cost pressure for technology firms.
In recent months, the shekel has risen more than 25% against the dollar compared to April 2025. This increase was driven by a decline in Israel's risk premium, gains in U.S. stock markets where Israeli financial institutions invest, and a global weakening of the dollar.
Export Revenues Eroding in Local Currency
Exports are seen as one of the main engines of production and growth in Israel's economy. According to central statistics, goods and services exports account for about one-third of the country's gross domestic product.
However, for companies earning revenue in dollars but paying salaries, rents, and operating expenses in shekels, every rise in the exchange rate means a decrease in income when converted to local currency. Even if the same product sells at the same price abroad, the shekel amount received by the company decreases.
Ron Tomer, President of the Manufacturers Association of Israel, stated that the strength of the shekel has become one of the biggest challenges facing Israeli industry. He emphasized that this weakens exporters' competitiveness in the global market.
Tomer noted that exporters cannot carry these losses indefinitely and said a strong shekel does not benefit a production-focused economy.
Technology Sector Also Feels Exchange Rate Pressure
The impact of the exchange rate increase is most strongly felt in the technology sector. According to the Israel Innovation Authority, the high-tech sector accounts for about 20% of the national economy, provides 11% of employment, and covers more than half of exports.
Most of these companies earn their revenues in dollars from abroad, while a significant portion of their operational costs remain in shekels. This structure narrows profit margins as the local currency strengthens.
Eugene Kandel, former Chairman of the National Economic Council and the Start-Up Nation Policy Institute, warned that the erosion of cost advantages could push more companies to expand operations outside Israel.
Economist Yaakov Shenin also said the shekel's rise is suppressing technology companies' profitability during a period when global investment appetite is already slowing.
Freelancers and Service Providers Also Affected
The exchange rate pressure is not limited to large companies. Lawyers, financial consultants, independent software developers, and doctors working with foreign institutions who receive fees from abroad have also started to see their income decline in shekel terms.
For example, a monthly income of $10,000 was about 39,000 shekels when the dollar was at 3.9 shekels. When the rate dropped to 2.96 shekels, the same income fell to approximately 29,600 shekels. Although income remained stable, the difference significantly reduced local purchasing power.
Despite this decline, rent, education, and daily service expenses continue to be paid in shekels. This makes the balance between income and expenses even more fragile for those living on foreign income.
Dual Pressure on the Central Bank
For the Bank of Israel, the strengthening shekel has created a multifaceted problem. While a strong exchange rate helps curb inflation and reduce import costs, it narrows exporters' profit margins and puts pressure on sectors dependent on foreign markets.
According to the newspaper, the impact of exchange rate declines on inflation is about 20%, while the effect of the shekel's appreciation remains below 10%. Therefore, the bank does not view the strong shekel as an urgent inflation issue.
Bank officials consider the strong shekel not as a fundamental problem on its own but as a reflection of broader economic conditions. However, the $801 million foreign exchange purchase in May was recorded as a technical intervention against unusual liquidity and pressure signals in the market.
The delayed explanation for this intervention increased criticism. Market circles wrote that although the step was technically successful, it raised questions about the central bank's credibility.
Impact on Taxes and Public Revenues
The strong shekel trend affects not only the private sector's balance sheets but also public revenues. Since companies earning significant income in dollars pay taxes in shekels, the strengthening local currency can limit the growth of the tax base.
This situation has led major technology companies to seek flexibility in tax payments. It was reported that companies like Nvidia and Google requested the Israeli tax authority to allow some tax obligations to be paid in dollars instead of shekels.
These requests are considered important due to the technology sector's weight in Israel's economy. The sector accounts for about one-fifth of the country's GDP, more than half of exports, and a significant portion of income tax collection.
High Exchange Rate Coincides with Budget Pressure and War Expenses
At the same time, defense spending needs have increased in Israel. According to Kadiye, security agencies submitted a request for a defense budget of 188 billion shekels.
If the strong exchange rate reduces company profitability and slows public revenues, it could make it harder for the government to meet rising expenditure demands. Thus, exchange rate movements create a broader chain of pressure extending from private sector balance sheets to public finances.
Economists believe that a prolonged strong shekel may lead some companies to reconsider their assets within Israel. Lower-cost production and development centers could become more attractive, especially for multinational technology companies.
Therefore, the debate in Israel has shifted from the gains of a strong currency to the economic costs it imposes. The balance between benefits and losses caused by the exchange rate is becoming increasingly critical for production and export-oriented sectors.
