By Channah Yurovsky, Staff Writer
War is usually poison for any currency. When missiles fly and uncertainty dominates headlines, risk premiums rise, prompting investors to pull their money out of the affected country and move it to perceived safer havens. This capital flight weakens domestic currency because demand for it falls, while demand for the perceived safe havens such as the U.S. dollar, gold or government bonds rises. As money leaves, the value of the domestic currency drops, making it more expensive for the country to import goods and borrow internationally, increasing inflation rates. This pattern has repeated itself throughout history, from twentieth-century Europe to emerging markets today. And yet, over the past year, Israel’s economy has defied this logic, its currency performing counterintuitive feats under prolonged military pressure. Despite being in an active state of war, the shekel unorthodoxly strengthened, something few other currencies have been able to achieve.
Even before October 7, Israel has been embroiled in conflict, absorbing military shocks, political instability and global scrutiny. Despite this, the shekel has defied historically recurring odds and has not collapsed. In fact, according to the Federal Reserve Economic Data, it has appreciated meaningfully against the U.S. dollar, reaching exchange rates around 3.1-3.2 ILS per USD in early 2026. Simultaneously, the U.S. continues to grapple with persistent inflation, mounting debt and growing uncertainty about its long-term fiscal trajectory.
This divergence raises broader questions about the U.S.’s long-standing position as the global economic hegemon. In economic terms, a hegemon is a country that holds disproportionate influence over the global system; its currency dominates trade, debt and financial markets. For decades, the U.S. dollar has served as the world’s primary reserve currency and a haven during periods of uncertainty. Today, that dominance is increasingly debated as inflation persists and fiscal pressures mount. In contrast, Israel’s currency has strengthened despite wartime conditions that historically weaken national currencies. This is not a market fluke. Rather, it reflects a gradual structure shift away from a world dominated by a single economic hegemon towards a more balanced global order. Within that transition, Israel’s long-term planning, innovation-driven economy and disciplined monetary policy continue to earn confidence from global markets.
Currency strength ultimately comes down to confidence, credibility and demand. According to official data from the Bank of Israel, the country’s foreign exchange reserves (holdings of foreign currencies and assets used to support and stabilize the national currency) reached record levels in 2025, totaling over $230 billion. These reserves serve as a critical stabilizing force, giving the central bank the ability to intervene during periods of volatility and signal long-term credibility to investors. That credibility proved essential at the onset of war. At the start of the conflict, the Bank of Israel actively intervened in currency markets to prevent disorderly depreciation. As conditions stabilized, market fundamentals reasserted themselves. Investors seemed to regain confidence — not because the war disappeared, but because Israel’s financial institutions demonstrated financial preparedness and control.
Another major driver of demand for the shekel is Israel’s export profile. Unlike economies dependent on tourism or low-value manufacturing, Israel exports high-value services, particularly in technology, cybersecurity, defense systems and medical innovation. Even in times of conflict, global demand for Israeli innovation remains strong; therefore, this steady flow of foreign investment and export revenue sustains demand for the shekel, insulating it from short-term geopolitical shocks.
Energy has also proven to be a factor that strongly shapes Israel’s economic position. With the development of natural offshore gas fields such as the Leviathan and Tamar, Israel has transitioned into an energy exporter. This provides a tangible asset base that strengthens its current account and adds stability to the currency, something the U.S. dollar lacks due to its current inflationary pressures and fiscal expansion.
This does not attest to a complete collapse of the U.S. dollar. On the contrary, the dollar remains the world’s dominant reserve currency for the time being. According to the International Monetary Fund (IMF), it continues to account for the largest share of global reserves, trade invoicing and cross-border transactions. However, dominance is no longer synonymous with unquestioned stability. Persistent inflation has forced the Federal Reserve into a difficult position, and to control price growth, they have raised interest rates aggressively. To sustain economic momentum, policymakers are now expected to reverse course, but this uncertainty directly weakens the predictability of the dollar — its most valuable attribute. The IMF additionally points to a gradual diversification away from exclusive dollar reliance. In other words, the trend is not toward a single replacement summary, but toward a more multipolar monetary system. In an environment like this one, currencies backed by disciplined institutions and real economic output gain relative strength.
The shekel’s performance reflects something deeper than market sentiment; it reflects systems. Economies, like individuals, do not rise to the level of intention; instead, they fall to the level of infrastructure. Israel’s economy is a result of decades of investment in innovation and education, reserve accumulation, and long-term planning. This system is no accident. Jewish tradition is known to emphasize foresight, accountability and economic integrity. Biblical laws such as honest weights and measures, which mandate fairness and transparency in trade, reflect an early understanding of trust as the foundation of economic stability. Another example is Yosef’s strategy to store during years of abundance in preparation for those of famine; mirroring modern principles of reserve-building and risk management that to this day impact the economic institutions of the Jewish state.
The Bank of Israel’s accumulation of foreign exchange reserves is just a contemporary expression of this philosophy. But what makes this even more striking is that markets appear to be “pricing” Israel’s future as more certain than that of the United States.
From an investment perspective, a strong shekel introduces the possibility of trade-offs, meaning certain economic benefits come with corresponding costs. A stronger currency makes imports cheaper, lowering the cost of foreign goods and inputs for Israeli consumers and businesses. At the same time, it can complicate exports by making Israeli products more expensive for foreign buyers. However, Israel’s exports are not low-margin goods competing primarily on price; they are high-value technologies competing on necessity and quality. As a result, this ultimately leads global buyers to remain willing to pay a premium. When looking ahead, this dynamic suggests pressure on the USD-ILS relationship as strength persists.
As the U.S. navigates inflation control and fiscal restructuring, Israel’s relative economic strength helps explain the continued pressure on the USD-ILS relationship. While the dollar faces uncertainty tied to debt and monetary reversals, Israel’s economy remains agile, export-driven, and deeply embedded in global value chains, regardless of size. According to the OECD (Organization for Economic Co-operation and Development), Israel’s GDP growth is estimated to reach approximately 4.9% in 2026, outperforming many advanced economies. This growth outlook reinforces market confidence in the shekel and helps sustain its strength relative to the dollar.
The shekel’s rise in power during wartime has been a surprising and instructive phenomenon, illustrating how modern economic power is increasingly tied to systems, credibility and productive capacity, rather than size alone. However, the U.S. dollar is not collapsing; it is recalibrating amidst global change and restructuring itself to fit into this crowded balance. At the same time, the shekel is not completely defying economic logic; it is simply reaping the market rewards of a disciplined, high-output economy that has been growing and developing for years.
Currencies tell stories, and the story of Israel’s shekel is one of preparation, resilience, and confidence. Dare I say increased growth and power? Meanwhile, the U.S. dollar is telling a story of transition as it loses grip on the hegemony it once held, trying to resurface amid growing imbalance. As the world moves toward a more balanced economic order, the market reads back to us a fundamental truth in this story of capital: strength and power are not about avoiding crisis and hanging onto a system that no longer holds power; rather, they’re about building strong systems that are capable of enduring the crises that will inevitably occur.
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