Foreign and institutional investors sold FX in Q3, supporting the shekel’s appreciation

ISRAEL - In Brief 06 Nov 2025 by Sani Ziv

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The shekel continued to strengthen in the third quarter, appreciating by 2.0% against the U.S. dollar and 1.9% against the euro, following sharp gains of 9.3% and 1.5% in Q2, respectively. The appreciation reflected a decline in Israel’s risk premium and improved investor sentiment after Operation “Am K’Lavi” and the ceasefire agreement with Hamas. According to the Bank of Israel’s sectoral estimates, institutional investors were the main sellers of foreign currency in Q3, with net sales of $9.2 billion, compared with modest purchases in Q2. Foreign investors also sold FX, though at a smaller volume of $4.9 billion, down from $8.9 billion in the previous quarter. In contrast, the business sector was a net buyer of $7.5 billion, mainly due to stronger import demand and more moderate FX sales by exporters. The financial sector, primarily banks, shifted from moderate sales in Q2 to net purchases of $1.2 billion in Q3. We think the massive FX sales by institutional investors were driven by rising global equity markets and a decline in foreign-currency exposure following the end of the war with Iran. FX volatility also eased: realized volatility of the shekel–dollar exchange rate fell by 1.7 percentage points to 9.4%, while implied volatility on OTC shekel–dollar options declined by 0.5 points to 9.3%. Similar moderation was observed across emerging markets, where average implied volatility dropped to 9.6%. Looking ahead, we expect the shekel’s trajectory to remain highly sensitive to geopolitical developments in the coming months. A comprehensive agreement including the reconstruction of Gaza, the disarmament of Hamas, and normalization steps with additional Arab states, w...