Israeli Foreign-Exchange Market

The Israeli foreign-exchange market is the market in which the new Israeli shekel (NIS) is exchanged for foreign currencies and related currency risks are managed. Trading takes place mainly over the counter (OTC), especially between banks and their customers in Israel and abroad and among banks themselves. The Bank of Israel monitors the market, publishes representative exchange rates, and retains the ability to intervene under its exchange-rate policy. ^[1]

Structure and trading

The market is not principally organized as a single exchange with one central order book. The Bank of Israel describes foreign-currency trading as occurring mainly between banks and their customers in Israel and abroad, and among banks themselves. This OTC structure means that transactions are negotiated between counterparties or intermediated by financial institutions rather than necessarily executed on a centralized public venue. ^[1]

The shekel is traded against the U.S. dollar and other currencies. Currency trading serves commercial and financial needs: businesses may exchange receipts and payments associated with trade, while investors and financial institutions may transact in currencies as part of cross-border investment, funding, or risk management. These examples describe common purposes of FX activity; the Bank’s published market material specifically tracks activity across financial and nonfinancial sectors, institutional investors, and OTC transactions. ^[2][3]

The Bank of Israel’s statistical presentation of shekel/foreign-currency turnover concerns OTC transactions. It defines the reported turnover as the gross volume of transactions, counting purchases and sales in absolute value. Thus, turnover measures the scale of transactions rather than the net amount of currency bought or sold. A large gross turnover figure can include offsetting purchases and sales and should not be interpreted as an equivalent net flow or change in currency holdings. ^[2]

Participants and sources of activity

Banks are central counterparties and intermediaries in the market, trading with customers and with one another. The customer base includes residents and nonresidents. The Bank of Israel’s reporting on market activity distinguishes financial-services participants from nonfinancial-sector participants and separately discusses institutional entities. The categories matter because different participants may trade for different reasons, including commercial currency needs, portfolio investment, or management of currency exposure. ^[1][3]

Israeli institutional investors—including pension funds, provident funds, advanced training funds, and insurance companies—manage long-term savings and hold foreign assets and foreign-exchange exposures. Their portfolio allocations can therefore be associated with currency transactions, though the relationship between a particular trade and an investor’s overall exposure depends on its positions and hedging activity. The Bank of Israel publishes information on institutional investors’ sources and uses, assets, foreign-exchange exposures, and foreign assets. ^[4]

Nonresidents also participate in the shekel market. Their activity can reflect financial investment and other cross-border transactions, while nonfinancial firms may buy or sell foreign currency in connection with ongoing operations. The Bank of Israel’s annual account of sector activity for 2024 reported that nonresident financial-sector activity closely followed changes in the exchange-rate trend, while nonresident nonfinancial participants continued selling foreign currency for ongoing activities at a scale similar to the two preceding years. The same account reported net U.S.-dollar sales of $9 billion by institutional entities in 2024 as equity prices abroad rose. These are observations for that year, not general rules about how the sectors behave. ^[3]

Exchange-rate policy and central-bank role

Israel’s exchange-rate policy is based on unrestricted fluctuation of the domestic currency against other currencies. The Bank of Israel states that foreign-currency controls were gradually repealed through a liberalization process in the early 1990s and that no control restrictions exist today. The Bank nevertheless reserves the right to intervene when necessary; its statutory functions include supporting the orderly activity of Israel’s foreign-currency market. ^[1]

The Bank’s intervention tools include purchasing foreign currency in exchange for shekels. It says such purchases may be used to moderate negative effects that shekel appreciation could have on inflation and economic activity. Intervention is conducted through the Bank’s Markets Department in accordance with policy set by the Monetary Committee, and the Bank says it regularly examines the necessity, effectiveness, cost, and alternatives of that policy. The option to intervene does not mean that the shekel is maintained at a fixed parity or within a predetermined trading band. ^[5]

The Bank has also used foreign-exchange swaps to address dollar-liquidity pressures. In March 2020, amid heightened global financial-market volatility and a shortage of dollar liquidity in many markets, it announced dollar/shekel swap transactions with domestic banks. The Bank described the purpose as providing dollar liquidity to the domestic banking system. This was a liquidity measure and is distinct from routine publication of exchange rates or from the policy option of buying foreign currency in the spot market. ^[5]

The Bank’s exchange-rate policy operates alongside its monetary-policy responsibilities. Exchange-rate movements can affect the domestic prices of imported goods and the competitiveness of exports, among other channels. The Bank identifies the possible effects of appreciation on inflation, domestic manufacturing, and exports as relevant considerations in explaining its foreign-exchange activities. The market itself, however, is not governed by a publicly announced fixed exchange-rate target. ^[5]

Representative and effective rates

On each foreign-currency business day in Israel, the Bank of Israel publishes representative exchange rates for the shekel against foreign currencies. The representative rate is based on the market rate prevailing when it is set. The Bank describes the rate as an indicator: it is not legally obligatory, and parties to transactions indexed to foreign currency may agree to use another rate. ^[1]

For the U.S. dollar, the representative rate is expressed as the shekel price of one dollar and is calculated from bank quotations collected during part of the day. Rates for other currencies are calculated using the dollar representative rate and exchange rates between the dollar and those currencies at publication time. These published rates provide a widely available reference, but they are not necessarily the exact rate available to any particular customer, for whom execution terms depend on the transaction and counterparty. ^[6]

The Bank also publishes effective exchange-rate measures. Unlike a bilateral rate, which compares the shekel with one currency, an effective rate compares it with a basket. The weights reflect the currencies’ importance in Israel’s foreign trade. Effective measures therefore provide a way to assess the shekel against a group of trading-partner currencies rather than treating the U.S. dollar as the only relevant comparison. ^[6]

Derivatives, reporting, and market data

Foreign-exchange derivatives are part of the market’s risk-management and trading activity. The Bank of Israel requires specified entities to report details of relevant transactions involving foreign-currency derivatives, as well as certain index and interest-rate derivatives. The stated purpose is to improve the Bank’s ability to pursue monetary and foreign-currency policy and monitor developments in the foreign-exchange and capital markets. ^[7]

The reporting framework includes daily reporting of specified transactions and monthly reporting of open positions. It applies to banking corporations and to certain portfolio managers, members of the Tel Aviv Stock Exchange, foreign banks, nonresidents, and financial intermediaries that meet the conditions set out by the Bank. For some covered entities, the criteria include average daily transaction amounts of at least $15 million over the preceding 12 months. The Bank states that the requirement took effect on January 1, 2017. These thresholds describe the reporting rule, not a minimum size for participation in the market generally. ^[7]

The Bank publishes several kinds of market information, including exchange rates, shekel/foreign-currency turnover, risk and volatility measures, and periodic accounts of activity by major sectors. These data answer different questions: exchange rates describe currency prices; turnover indicates gross transaction activity; volatility measures characterize price variation; and sector reports discuss patterns in participants’ buying and selling. Because measures differ in scope and construction, they should not be treated as interchangeable. ^[2][3][6]

Market movements and interpretation

The shekel’s value can change against individual currencies and against a trade-weighted basket, and those measures need not move by the same amount. The Bank of Israel’s account of 2024 illustrates this distinction: it reported that the shekel depreciated by 0.6 percent against the U.S. dollar over the year while appreciating by 5.4 percent against the euro and by 4.4 percent against the nominal effective currency basket. The report also described acute exchange-rate volatility during the year. ^[3]

Movements in the exchange rate reflect conditions and expectations affecting supply and demand for currencies, including cross-border trade and investment, portfolio decisions, and broader financial-market developments. Sector data can help describe which participant groups were buying or selling, but they do not by themselves establish the cause of a particular exchange-rate movement. The Bank’s periodic reports therefore combine exchange-rate developments with sectoral information and measures of volatility. ^[3]

The Israeli foreign-exchange market is consequently characterized by OTC trading, participation by domestic and foreign banks and customers, currency activity connected to investment and economic operations, and a floating exchange rate accompanied by central-bank monitoring and a retained intervention option. Its official rates and turnover statistics are reference and monitoring tools; they do not constitute a guarantee of a particular exchange rate or a complete record of every individual transaction. ^[1][2][5]