Reports on Tuesday morning that the US and Iran are returning to the negotiating table in an attempt to end the war through a diplomatic agreement sent stock markets around the world higher. In Israel, alongside gains on the stock exchange, the dollar continued to lose ground and is now at its lowest point in 30 years. The dollar fell by more than 1.5% and was trading at 3.01 shekels. Traders have already begun openly discussing a scenario in which the dollar drops below 3 shekels, a level that until recently seemed almost unimaginable.
What is driving such a sharp drop in the dollar in Israel? In principle, the dollar is weakening worldwide, but in Israel it is weakening even more. That is mainly because of the assumption that if the war with Iran does indeed end, and if the US reaches a diplomatic agreement with the ayatollah regime that leads to a dramatic reduction in the threats facing Israel, the Israeli economy is expected to be the main beneficiary of the process.
This is not only about the postwar rehabilitation process, which will require considerable investment, but also about a potentially significant decline in the risk premium, which already has broad implications for Israel's economic development.
Looking at the real economy, which points to positive prospects ahead assuming the war ends with a reasonable-to-good agreement for Israel, it is also necessary to examine the financial side. Israel is in a situation of very low unemployment. The full effect of reservists returning from military service has not yet been seen, but when the economy's growth potential is weighed alongside temporary weakness in the labor market, the picture that emerges is one of institutional investors receiving more deposits than redemptions.
A senior investment manager at one of Israel's largest institutional bodies told Israel Hayom that institutional investors are still absorbing surplus inflows of about 6 billion shekels each month, requiring the money to find investment channels.
"If you look at the potential of the global market versus the Israeli market, we are currently giving priority to Israeli allocation. That does not mean we are pulling money out of overseas markets, only that we are investing less there than we would have in the past," he said.
Asked how this is reflected in day-to-day investment activity, the manager replied: "When we receive coupons from dollar-denominated bonds or dividends, and there are many of those now, we keep them in dollars. But new money coming in is looking for truly attractive opportunities abroad, and everything else goes into the local market. That is how we balance the rebound in Israel with creating a safety cushion for the years ahead."
As for the macroeconomic outlook, Victor Bahar, chief economist at Bank Hapoalim, said the ceasefire in the war with Iran was welcomed by markets around the world, and even more so in Israel.
"In practice, the first round of talks between the US and Iran has meanwhile run aground, and the war in the north is continuing. Economic activity in most of the country has returned to full routine, including the education system. Households are returning to consumption levels in line with those seen before the war, and we may soon begin to see reconstruction work, although the damage was less severe than during the 12 days last year. In our assessment, even in a scenario in which we do not return to active fighting with Iran, growth in the second quarter of this year will not resemble in strength what was seen in the second half of 2025. Fewer businesses and households are expected to receive compensation from the state, and because the current campaign has broad global effects, those are also expected to affect the growth path going forward. In such a scenario, growth this year is expected to stand at about 3%."
