The rapid strengthening of the shekel against the dollar in Israel has brought economic challenges, particularly for exporting companies and the technology sector. The local currency's recent gains have translated into profit pressures for many companies and income erosion for some workers.
Compared to April 2025, the shekel has risen more than 25% against the dollar, 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 Decline in Local Currency Terms
Exports are a key driver 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, companies earning revenue in dollars but paying salaries, rents, and operating expenses in shekels face a reduction in local currency income with every rise in the exchange rate. Even if the 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 strong shekel has become one of the biggest challenges facing Israeli industry. He emphasized that this weakens exporters' competitiveness in global markets.
Tomer also noted that exporters cannot bear these losses indefinitely and that a strong shekel does not benefit a production-focused economy.
Technology Sector Also Feels Currency 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 represents about 20% of the national economy, provides 11% of employment, and accounts for more than half of exports.
Most of these companies earn revenue in dollars from abroad, while a significant portion of their operational costs are in shekels. This structure narrows profit margins as the local currency strengthens.
Eugene Kandel, former Chair 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 squeezing technology companies' profitability amid an already slowing global investment appetite.
Freelancers and Service Providers Also Affected
The currency 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 local purchasing power declined significantly.
Despite this drop, rent, education, and daily service expenses continue to be paid in shekels. This imbalance makes the financial situation more fragile for those living on foreign income.
Dual Pressure on the Central Bank
The strengthening shekel poses a multifaceted challenge for the Bank of Israel. While a strong currency helps curb inflation and reduce import costs, it squeezes exporters' profit margins and pressures sectors dependent on foreign markets.
According to reports, the inflation impact of a currency depreciation is about 20%, whereas the effect of the shekel's appreciation remains below 10%. Therefore, the bank does not view the strong shekel as an urgent inflation issue.
Officials consider the strong shekel not as a standalone problem 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 drew criticism. Market observers noted that while the move was technically successful, it raised questions about the central bank's credibility.
Impact on Taxes and Public Revenues
The strong shekel affects not only the private sector's balance sheets but also public revenues. Companies earning a significant portion of their income in dollars pay taxes in shekels, so a stronger 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 significant given the technology sector's weight in Israel's economy. The sector accounts for about one-fifth of GDP, more than half of exports, and a substantial portion of income tax collections.
High Exchange Rate Coincides with Budget Pressures and Defense Spending
At the same time, Israel faces increased defense spending needs. According to Kadiye, security agencies have submitted a demand for a defense budget of 188 billion shekels.
If the strong shekel reduces company profits and slows public revenues, meeting the state's rising expenditure needs could become more difficult. Thus, the currency movement creates a broader chain of pressure extending from the private sector's balance sheets to public finances.
Economists believe that a prolonged strong shekel may prompt some companies to reconsider their assets within Israel. Lower-cost production and development centers could become more attractive, especially for multinational technology firms.
Therefore, the debate in Israel has shifted from the benefits of a strong currency to the economic costs it imposes. Balancing the gains and losses caused by the exchange rate is becoming increasingly critical for production and export-oriented sectors.
