Within the next few days the US is expected to complete the deployment of its military forces in the Middle East in advance of a possible strike on Iran and perhaps even the overthrow of the regime of the ayatollahs. Every day we hear of the aircraft carrier USS Abraham Lincoln nearing the region, carrying dozens of fighter aircraft and thousands of troops, together with submarines and destroyers. How will an attack affect the capital market in Israel and the US dollar-shekel exchange rate? The experts sketch the main scenarios.
1. The Iranian regime falls
"One event could bring the dollar-shekel exchange rate to NIS 2/$, and that is the fall of the regime in Iran. Such a situation would lead to a massive flow of capital to Israel, a sharp drop in Israel’s risk premium, economic growth in the region, and investment at historically high levels." This is the prediction of Prof. Leo Leiderman, head of the Institute for Research of Economic Strategies (IRES) at the Peres Academic Center, chief economic adviser at Bank Hapoalim, and formerly head of the Research Department at the Bank of Israel. He made the remarks at a conference held by Horizon Capital Markets last week.
This is a surprising forecast, as it means further appreciation of the shekel by tens of percentage points, when it is already very strong. The shekel is currently traded against the US dollar at around NIS 3.13/$, almost an historical peak. According to Matan Shitrit, chief economist at Phoenix Financial, applying the "simplistic model" presented by the Bank of Israel a few months ago whereby the shekel-dollar rate is correlated with the S&P 500 Index, the exchange rate should by now be at NIS 2.95/$.
Talking to "Globes", Leiderman confirmed his forecast, and said, "There is no sacred number that represents a barrier. At one time it was thought that the shekel-dollar rate couldn’t fall below NIS 3.3/$. Then they said that the Bank of Israel wouldn’t allow it to fall below NIS 3.2/$. It is certainly conceivable that the exchange rate could go much lower. For example, were we to wake up one morning to find that the current regime in Iran had fallen and that Teheran was headed for a new reality, it’s reasonable to suppose that on that very day we would see the shekel a long way below NIS 3/$. The Israeli currency could even reach NIS 2/$. It’s a matter of supply and demand, and we’re talking about an influx of foreign currency. If there’s a boom in Israel’s financial markets, the stock market will rise and of course bond yields will fall, as will Israel’s risk premium."
Leiderman points out another possibility that would lead to a similar result. "If Saudi Arabia joins the Abraham Accords, the same phenomenon will occur. It will signal a significant decline in geopolitical risk in Israel in particular and in the entire Middle East, and so financial and non-financial inward investment in Israel and in the region in general will grow substantially."
Mizrahi Tefahot Bank chief markets economist Ronen Menachem agrees that the shekel could continue to strengthen, but says that the NIS 2/$ scenario is extreme. "Change in the regime or in the character of the regime in Iran is already partly priced into the shekel exchange rate and in the stock market as well," he says. Despite that, he agrees that such a development would reduce the uncertainty surrounding Iran and its proxies and says that "a lowering of the security threat would work in favor of the shekel."
Menachem agrees that such a scenario could give a push to a regional peace process and to broadening of the Abraham Accords, and accordingly also give a push to the shekel against the US dollar. "There will be a substantial improvement in sentiment towards the Israeli economy and the capital market, among both Israeli and foreign investors," he believes.
2. No attack on Iran
There is also the opposite possibility, that no attack takes place and the sides return to negotiations on a nuclear agreement. In Menachem’s view, this is a middle scenario. "There will be some reduction in the level of threat from Iran and its proxies, but we won’t see any substantial change in the shekel-dollar exchange rate."
Horizon Capital Markets founder and CEO Itay Lipkovitz believes that foot-dragging is the most negative scenario for Israel. "The Iranians can continue producing ballistic missiles and rehabilitating the military capabilities that we hit in Operation Rising Lion, and they will continue to prepare themselves for a future conflict, which means that the market will also continue to price in a future conflict.
"Such a scenario could continue for a year. The fact that the Americans have sent large forces to the region doesn’t mean that they will use them in the end. You have to remember that mid-term elections will soon take place in the US, and they won’t want to reach them after a long war. If their assessment is that an attack on Iran will entangle them, they won’t go ahead in my opinion, or they’ll attack in a limited way just to tick the box. In that event, the shekel-dollar rate won’t go below NIS 3/$."
3. A short war with Iran
A third possible scenario is a short war with Iran. "A short war could lead the markets to the conclusion that there will be a fall in the level of risk, that the chances of another war have declined, and that the chances of regional arrangements have risen. "That situation could have a positive impact on the shekel, but the impact will be fairly minor," says Menachem.
Lipkovitz is convinced that this is a good scenario. He does think that in the short term it will be accompanied by uncertainty and that the shekel will weaken and the markets will fall, but he says that after two or three weeks the situation will stabilize. "Even if the Iranian regime doesn’t fall but its capabilities are hit, that could be positive for the markets," Lipkovitz explains. "A worsening of Iran’s economic problems would also reduce Israel’s risk premium and bring more foreign investors here, strengthening the shekel and local stock market significantly," he says.
4. A long war with Iran
There is also the scenario in which the campaign against Iran run into trouble. In Menachem’s view, a long war with Iran and its proxies, which will hit Israel’s GDP, bring further attacks by the Houthis in Yemen, and may make the US reconsider its policy in the region, is the most negative scenario for Israel, and would be liable to lead to the shekel depreciating against the US dollar.
As far as Leiderman is concerned, any result that is not the fall of the Iranian regime will be the same as the present situation. "In that event, we remain with the risk that Iran has nuclear capabilities," he says. "Another important question is what will happen the day after? Take Venezuela for example. Trump captured Maduro, but investors aren’t going back there because Maduro’s people are still running the country, and the road to change is still a long one."
At any rate, everyone agrees about one thing, namely that all the scenarios are very fluid. It’s enough to look at the shekel-dollar exchange rate in the past few years, as it crashed against the dollar to over NIS 4/$ after the October 7 massacre, and then made it all the way back to NIS 3.13/$, Moreover, while the Israeli economists talk about the shekel being likely to continue strengthening, Citi estimated only recently that it could actually weaken to NIS 3.8/$. "There’s a very broad range of scenarios," Menachem concludes.
Published by Globes, Israel business news - en.globes.co.il - on January 26, 2026.
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