Diplomatic pressure, security escalation weaken shekel

After several weeks of calm on the forex market, the shekel is weakening in early afternoon inter-bank trading. The shekel-US dollar exchange rate is up 0.89% at NIS 3.552/$, and the shekel-euro rate is up 1.59%, at NIS 4.031/€. Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.76% from Monday, at NIS 3.525/$, and the representative shekel-euro rate was set 0.93% higher at NIS 3.964/€.

The shekel is depreciating due to the escalation in security and political matters, and the growing concern about damage to Israel’s economic relations with its Western partners.

International pressure is intensifying

In particular, there has been harsh criticism from European countries of Israel’s activities in Gaza, which has led to a worsening of diplomatic relations. EU countries have slammed Israel’s expansion of military operations in the Gaza Strip, and insisted that there are serious obstacles to the entry of humanitarian aid for the residents of Gaza. The criticism comes as Israeli hostages continue to be held in Gaza tunnels.

The UK government issued a strong statement, announcing that it was suspending trade talks with Israel until further notice, a move that raises concerns about deep damage to trade relations with a key trading partner.

Prico Group CEO Yossi Fraiman says, “The escalation of fighting in Gaza and concern about damage to trade relations with Europe have led to the shekel weakening against the dollar and the euro.” However, Fraiman notes that this may not be a sharp collapse: “Supply from tech companies that continue to realize holdings in foreign currency may soften the depreciation and curb sharper declines in the shekel exchange rate.”

Tensions with Iran are escalating

Along with the diplomatic tensions, reports have increased about the possibility of escalation on the Iranian front. According to a CNN report, Israel is preparing to attack Iran, in parallel with reports about the progress of the nuclear talks that the US is conducting with Iran.

The CNN report notes that there is an internal dispute within the US administration on the likelihood of an Israeli attack, and that a decision on the matter has not yet been made. According to estimates, the manner and timing of any such action will be directly affected by Israel’s assessment of the results of diplomatic talks between the US and Iran.

Security and diplomatic developments raise the risk threshold in the local market, which pushes up Israel’s risk premium, and there is now concern about an increase in Israeli bond yields and also in the risk premium reflected in the CDS bond, which estimates the risk of Israel’s default.

Published by Globes, Israel business news – en.globes.co.il – on May 21, 2025.

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