Israeli financial institutions are gradually reducing their foreign currency exposure. The latest figures show that the exposure level is now lower than it was before the outbreak of war in October 2023, and even lower than at the end of 2022, before Minister of Justice Yariv Levin announced his program for reform of Israel’s system of justice and the upset that followed on the foreign exchange market.
Meanwhile, the shekel is strengthening, and approaching levels not seen since the 1990s, while the US dollar is weakening on world markets. This is pushing the institutions to continue reducing their currency exposure, which further strengthens the shekel and sharpens the question: Will the Bank of Israel intervene?
Bank of Israel figures show that between September and November last year the institutions’ foreign currency exposure fell from 23.1% of their assets to 22.1%, that is, by one percentage point. Meitav chief economist Alex Zabezhinsky examined the general tracks of the advanced training funds of the ten largest financial institutions and found that the decline in their currency exposure continued in December, to under 19%. "This is a lower level than at the end of 2022, before the judicial overhaul and the depreciation of the shekel that it triggered," he says.
According to provident fund comparison company Gemel Net, Menora Mivtachim (21.4%) and Phoenix Financial (21.1%) remain at relatively high levels of currency exposure, while Altshuler Shaham (17.2%) and Harel (17.6%) have cut their exposures especially sharply.
"Unlike the Bank of Israel, which covers all the portfolios, I took the general tracks only of the ten largest institutions, because on the general track the institution decides how much currency exposure it wants. On the S&P 500 track the exposure is 100%, and the fund manager has no discretion about it. I want to know what these institutions do when they decide, and there are differences between them," Zabezhinsky explains.
He says that his first sampling in December 2022 showed an average exposure of under 20%. At that time the trend was the opposite of the current one: the institutions gradually increased their currency exposure, as the shekel weakened in response to the judicial overhaul program and the outbreak of war, to a peak of 26%. The turning point was the "pagers operation" against Hezbollah operatives in September 2024, following which Israel’s risk premium began to fall, and, according to Zabezhinsky, the institutions’ currency exposure fell as the shekel strengthened.
"The institutions can reduce their exposure further"
Analysis of market activity yields an interesting insight into the way in which the institutions chose to reduce their currency exposure. "If you have a portfolio that is half invested in Israel and half overseas, but you only want 20% currency exposure, then for the remaining 30% the institution buys hedges, futures contracts in which they sell dollars for a future date and thus reduce their foreign currency exposure," Zabezhinsky explains. "Sometimes they simply buy more securities in Israel than overseas. The method that the institutions have chosen recently is very rare. They actually sold overseas investments and bought in Israel. That’s a powerful statement, one that testifies to the fact that the Israeli market has outperformed."
This tilt towards Israel strengthens the shekel even further, says Zabezhinsky, who estimates that the trend is likely to continue. "In the past the institutions were even at 16% currency exposure, so I presume that they could fall further. Until when? We don’t know; there are many variables."
According to Mizrahi Tefahot Bank chief economist Ronen Menachem, the exposure level is the outcome of the institutions’ expectations about the shekel-dollar exchange rate. The stronger the shekel, the more the currency exposure occasions losses. "It’s a matter of adaptation. When you see the shekel strengthening and your working assumption is that that is likely to continue, you reduce exposure. The big question that the institutions are asking themselves is whether there is any reason to suppose that the appreciation of the shekel will be halted. The probability of that is low, and in my view the institutions think so as well," he says.
"A weakening of the shekel could be caused by a worsening of the security situation to the point of hostilities on several fronts. At the moment, despite the tensions, I don’t see signs of such a development. Even Moody’s chose to announce an upgrade to our rating outlook at the height of the tension with Iran," Menachem adds.
The connection to US markets, and to President Trump
Another factor that Menachem sees as pointing to a strong shekel in the long term is the connection between the shekel-dollar exchange rate and the US stock market.
Continued rises on US markets, particularly on Nasdaq, cause local investors to reduce their currency exposure and convert some of the dollars to shekels, which makes the shekel appreciate. The third factor is the local market. "The institutions know the market well and saw the handsome rises after Operation Rising Lion [against Iran]," Menachem says, adding that they examine the surrounding data, such as the growth figures, economic indicators, the improvement in the fiscal deficit, and exits by technology companies. "All these trends could lead to rises on the local market."
The fourth and last factor that Menachem mentions relates to the Bank of Israel’s considerations and the possibility that it might intervene in the foreign exchange market. Menachem believes that the bank will act only if it comes to the conclusion that there is a market failure. "In my view there is no change in the bank’s direction," he says, "A weak dollar helps President Trump and US exports, and so there is no reason to suppose that the dollar will strengthen."
Bank Hapoalim states in its weekly market review that "unlike past US presidents, who would praise the dollar’s strength, Trump has expressed support for weakening it, since in his view the currency should be allowed to find its level’"
With his declared policy, Trump signals that he will not accept with understanding any active intervention by other countries in the foreign exchange market, and so the market does not expect a change in direction for the shekel. "The US administration sees intervention in the foreign exchange market as an attempt to win a competitive advantage," Meitav says in its market review, adding that there are countries that have been put on a "blacklist" by the US Treasury.
Published by Globes, Israel business news - en.globes.co.il - on February 3, 2026.
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