Hey everyone, welcome back to My Weird Prompts. I am Corn, and I am joined as always by my brother, the man who probably dreams in currency charts and economic indicators.
Herman Poppleberry, at your service. And Corn, you are not entirely wrong. I have been staring at the exchange rate data since our housemate Daniel sent over that audio prompt this morning. It is honestly one of the most fascinating developments in the local economy we have seen in years.
It really is. And for those of you who do not live in Jerusalem with us, or who do not have a reason to check the dollar to shekel rate every morning, the numbers Daniel mentioned are pretty staggering. We are talking about a rate of three point zero six shekels to the dollar. To put that in perspective for our long term listeners, it was not that long ago, back in late twenty twenty-three, that we were looking at four shekels to the dollar. That is a massive shift in a relatively short amount of time.
It is a huge move, Corn. A twenty-five percent increase in the purchasing power of the shekel against the dollar in just over two years. Daniel was asking whether this is a case of the shekel getting stronger, the dollar getting weaker, or some combination of both. And he also touched on liquidity, which is a great technical angle. I think we should really dig into the mechanics here because this is not just about numbers on a screen. It affects everything from the price of the coffee we bought this morning to the long term viability of the high tech sector here.
Exactly. So let us start with the basics for a minute, because I think people often hear about exchange rates but do not necessarily think about the underlying plumbing. When we say the dollar is depreciating against the shekel, what is actually happening in the market? Is it literally just a giant auction house where people are bidding on pieces of paper?
In a sense, yes. The foreign exchange market, or Forex, is the largest and most liquid financial market in the world. It operates on the most fundamental principle of economics: supply and demand. If more people want to buy shekels than there are people willing to sell them, the price of the shekel goes up. But what makes it complex is why people want those shekels. It is not just for tourism or buying local goods. It is about investment flows, trade balances, and interest rate differentials.
Right, and I want to push on that interest rate point. We have talked about this in passing before, but how does the difference between the Federal Reserve's rates in the United States and the Bank of Israel's rates here actually drive that supply and demand?
That is a crucial piece of the puzzle. It is often called the Carry Trade. Think of it this way. If you are a massive institutional investor with a billion dollars, you want that money to grow. If the interest rate on a United States Treasury bond is three percent, but an equivalent Israeli government bond is paying five percent, you are going to want to move your money into shekels to get that higher return. To do that, you have to sell dollars and buy shekels. That massive buying pressure increases the value of the shekel.
So if the Bank of Israel keeps rates high while the Fed starts cutting them, which we have seen throughout twenty twenty-five and into early twenty twenty-six, that gap makes the shekel a more attractive asset. But is that enough to explain a drop to three point zero six? That seems like a very aggressive move just for a couple of percentage points of interest.
You are right, it is not the whole story. Interest rates are the short term driver, but the long term trend is often dictated by the Current Account. This is essentially the scorecard of a country's economic interactions with the rest of the world. Israel has been running a consistent current account surplus for years. We export more than we import, especially when you factor in services.
And when you say services, you really mean the high tech sector, right? I mean, that is the engine of this place.
Precisely. Think about how a typical Israeli unicorn operates. They might be headquartered in Tel Aviv, but their customers are in New York, London, and Tokyo. Those customers pay in dollars. But the company's biggest expenses—their engineers' salaries, the rent on their office, the taxes they pay—those are all in shekels. So every month, these companies have to sell millions of dollars and buy shekels just to keep the lights on. This creates a constant, structural demand for the shekel that does not exist for many other currencies.
That is an interesting point. It is almost like a built-in upward pressure on the currency that is independent of any specific news event. But let us look at the other side of Daniel's question. Is the dollar itself weakening globally? Because if the dollar is losing value against the euro and the yen at the same time, then the move against the shekel is just part of a broader trend.
That is exactly what we need to disentangle. If you look at the Dollar Index, which measures the dollar against a basket of major currencies, it has been under some pressure lately. There are concerns about the total United States national debt, which as of early twenty twenty-six is pushing toward thirty-nine trillion dollars. There is also the long term question of de-dollarization, where major trading blocs are trying to settle trade in their own currencies. When the world starts to question the dollar as the undisputed reserve currency, you see a general softening.
So it is a double whammy. You have the shekel being pulled up by a strong local tech economy and higher interest rates, and you have the dollar being pushed down by global macroeconomic concerns and fiscal policy in Washington. But Herman, I remember when we were at four point zero shekels to the dollar back in October of twenty twenty-three. That was a moment of extreme stress. What changed so drastically between then and now to bring us down toward three point zero?
That is where the specific local context comes in. The peak of four point zero was driven largely by uncertainty and risk. Investors do not like uncertainty. When there is a conflict or political instability, people flee to safe havens. Usually, the dollar is that safe haven. People were selling shekels because they were worried about the stability of the local economy. But what we saw over the last two years was a remarkable level of resilience. The tech sector did not collapse; in fact, the Artificial Intelligence boom of twenty twenty-four and twenty twenty-five brought a fresh wave of investment into Israeli startups. And perhaps most importantly, the natural gas fields in the Mediterranean kept pumping.
Ah, the gas. We cannot talk about the shekel without talking about the Leviathan, Tamar, and Karish fields. How much of this is just Israel becoming an energy exporter?
It is a massive factor. Before these fields were online, Israel had to buy almost all of its energy in dollars. Now, not only are we saving those dollars, but we are exporting gas to Egypt and Jordan, which brings in foreign currency. This has fundamentally changed the country's balance of payments. It is actually a classic case of what economists call the Dutch Disease, where a surge in natural resource exports makes the local currency so strong that it hurts other export sectors, like manufacturing.
Right, because if the shekel is too strong, that Israeli engineer we talked about earlier becomes twenty-five percent more expensive for a United States company to hire, even if their salary in shekels stays exactly the same. That has to be a huge concern for the government.
It is the primary concern of the Bank of Israel. They are in this constant tug of war. On one hand, a strong shekel is great for consumers. It means our imports are cheaper. Our gas is cheaper, our electronics are cheaper, and our vacations abroad are much cheaper. It keeps inflation down. But on the other hand, if the shekel hits three point zero or goes below it, it starts to really squeeze the profit margins of those tech companies. If they cannot compete on price, they might move their operations elsewhere.
So what does the Bank of Israel do? Do they just sit back and watch it happen, or are they actively intervening in the market?
They have a history of being very active. For years, they were buying up billions of dollars to try and keep the shekel from getting too strong. But their ability to do that is not infinite. Lately, they seem more willing to let the market find its own level, partly because the inflationary pressures from global supply chains have been so high that a strong shekel is actually a useful tool to keep local prices stable. They are sitting on a war chest of over two hundred billion dollars in foreign exchange reserves, which gives them a lot of credibility.
It is a delicate balance. I want to go back to Daniel's point about liquidity. For our listeners who might not be familiar with that term in a Forex context, why does the liquidity of the dollar-shekel pair matter? Is it not just another currency pair?
Well, the dollar-shekel pair is what we call a minor pair. It is not one of the majors like the dollar-euro or dollar-yen. Liquidity refers to how easily you can buy or sell a large amount of the currency without significantly moving the price. In a highly liquid market, if I want to sell a hundred million dollars, there are enough buyers that the price barely budges. In a less liquid market, like the shekel, that same trade could cause a huge spike.
And what influences that liquidity for the shekel specifically?
A lot of it comes down to institutional participation. One of the biggest factors in the shekel market is the hedging activity by Israeli institutional investors, like pension funds. These funds have hundreds of billions of shekels under management. A large portion of that money is invested in the United States stock market.
Wait, so if the S and P five hundred goes up, that actually affects the exchange rate here in Jerusalem?
Absolutely. This is one of the coolest mechanisms in our local market. When the United States stock market goes up, the value of those pension funds' dollar assets increases. To keep their portfolio balanced—say, at a target of twenty percent foreign exposure—they have to sell some of those dollars and buy shekels. So, ironically, when the United States economy is booming and the stock market is hitting all-time highs, it actually causes the shekel to get stronger because of this institutional selling of dollars. It is a very tight correlation.
That is wild. So it is almost like the shekel is a derivative of the United States tech sector in some ways. If Apple and Microsoft are doing well, the shekel gets a boost.
In a roundabout way, yes. And because these pension funds are so large, their trades represent a huge portion of the daily volume in the dollar-shekel pair. When they all decide to rebalance at the end of a month or a quarter, you see these massive surges in liquidity and price movement.
Daniel also mentioned the performance of the pair over the last five years. He noted that we hit a low of three point zero nine back in late twenty twenty-one, then peaked at four point zero, and now we are back down even lower at three point zero six. That is a lot of volatility for a country that is generally seen as having a very stable central bank.
It is, but look at what happened in those five years. You had a global pandemic, a massive tech boom, a period of significant domestic political debate, a major conflict, and a global inflationary cycle. The fact that the shekel has come through all of that and is now stronger than it was before the pandemic is a testament to the underlying structural strengths we talked about. The gas, the tech, and the fact that the Bank of Israel has that two hundred billion dollar reserve. That gives investors confidence.
I wonder about the psychological levels here. Traders always talk about round numbers. Three point zero seems like a massive psychological barrier. Do you think we actually break it?
That is the million dollar question, or I guess the three million shekel question. Breaking three point zero would be a historic moment. We have not been significantly below that level in decades. If we do cross it, it could trigger a lot of automated selling. A lot of companies have what we call stop-loss orders or hedging contracts that kick in at certain levels. If three point zero breaks, we could see a very fast move toward two point nine five or even two point nine zero.
Which would be incredible for us when we order stuff online, but potentially devastating for a startup that is trying to manage its burn rate. I was reading a report the other day that said some high tech companies are already starting to shift their hiring to places like Eastern Europe or India, not because the talent is better, but simply because the shekel has made Israeli talent too expensive in dollar terms.
That is the real risk. It is a phenomenon called offshoring. If your main product is human capital, and your human capital suddenly costs twenty-five percent more in your revenue currency, you have to find efficiencies. This is why you see the Finance Ministry and the Bank of Israel constantly debating. The Finance Ministry wants to help the exporters, but the Bank of Israel wants to keep inflation low and let the market be efficient.
It feels like a bit of a catch twenty-two. If they intervene to weaken the shekel, inflation goes up and everyone's cost of living in Jerusalem gets even higher. If they do nothing, the tech engine might start to sputter.
Exactly. And let us not forget the role of foreign direct investment. Despite everything, Israel remains a very attractive place for multinational corporations to set up research and development centers. When Google or Intel or Nvidia decides to expand their footprint here, they bring in hundreds of millions of dollars to build offices and hire people. That is another constant stream of dollars being converted into shekels.
So, if we look at the combination of factors Daniel asked about, it seems like we have a perfect storm. We have structural strength from tech and gas. We have institutional rebalancing from a strong United States stock market. We have a dollar that is facing some global headwinds. And we have an economy that has proven its resilience to shocks. It is not just one thing; it is all of them stacking on top of each other.
It really is. And I think the liquidity point Daniel made is important because it explains why the moves can be so sharp. When you have a market that is not as deep as the euro, these factors can really move the needle quickly.
You know, it is funny. We live here, and we see the prices in the supermarket going up, or at least staying high. People often ask, if the shekel is so strong, why isn't my grocery bill going down? Why is milk still so expensive?
That is a great question, and it goes back to the difference between exchange rates and local inflation. Just because the currency is strong doesn't mean retailers will automatically lower prices. There is a lot of stickiness in prices. Plus, a lot of our local costs, like labor and electricity, are not directly tied to the dollar. And let us be honest, the Israeli market is not always the most competitive. We have a lot of monopolies and duopolies that can keep prices high even when their import costs drop.
So we get the downside of a strong shekel for our jobs, but we do not always get the full upside for our wallets. That is a bit depressing, Herman.
Well, look on the bright side. If you are planning that trip to the States we talked about, your shekels are going to go a lot further than they did two years ago.
That is true. I should probably book those flights before the Fed decides to hike rates again and the whole thing reverses. But seriously, what should people be looking for in the next few months? If you are an expat living here, or someone who gets paid in dollars, what are the indicators that this trend might finally turn around?
I would watch three things. First, the Federal Reserve. If they start signaling that they are going to stop cutting rates or even hike them to fight a new wave of inflation, the dollar will likely catch a bid. Second, the United States stock market. If we see a significant correction or a bear market in tech stocks, those Israeli pension funds will have to buy dollars to rebalance, which would weaken the shekel. And third, keep an eye on the Bank of Israel's rhetoric. If they start sounding genuinely alarmed about the three point zero level, they might step in with some unconventional measures.
Like what? Negative interest rates?
Probably not negative, but they could increase their dollar purchases significantly, or they could implement some kind of tax on short term currency speculation. They have a lot of tools in the shed. But right now, it feels like they are content to let the market do its thing.
It is a fascinating time to be watching this. I mean, thinking back to episode four hundred and twelve when we talked about the rise of the Mediterranean gas economy, we predicted some of this, but the scale and the speed of this recent move has really caught a lot of people by surprise.
It really has. And it is a reminder that in the world of macroeconomics, everything is connected. A high school kid buying an iPhone in Tel Aviv is connected to a pension fund manager in a skyscraper in Manhattan, who is connected to a gas driller out in the middle of the sea. It is all one big, messy, beautiful system.
Well, I think we have given Daniel a lot to chew on. It is a combination of shekel strength and dollar weakness, fueled by tech, gas, interest rates, and institutional hedging, all playing out in a market that is just small enough to be volatile.
That is a pretty good summary, Corn. I might have to hire you as my junior economist.
Junior? I think I am at least an associate by now. But hey, if you are listening to this and you found this deep dive helpful, we would really appreciate it if you could leave us a review on your podcast app or on Spotify. It genuinely helps other people find the show and helps us keep doing these long-form explorations.
Absolutely. We love hearing from you guys. And if you have a topic you want us to tackle, you can always head over to myweirdprompts dot com and use the contact form there. We read every single one of them.
We really do. And a big thanks to Daniel for sending in this prompt. It gave us a great excuse to dive into the data. We are at episode five hundred and ninety-six now, and it is topics like this that keep it fresh for us.
Definitely. It is a weird world, and the prompts just keep getting better.
Alright, that is it for today's episode of My Weird Prompts. You can find all our past episodes and the RSS feed at myweirdprompts dot com.
Thanks for listening, and we will talk to you in the next one.
Peace.
