The Israeli new shekel (ILS) is the currency of Israel. It is one of the world’s most traded currencies on the foreign exchange market due to Israel’s developed economy and political significance globally. The shekel was introduced in 1980 to replace the Israeli lira and has undergone periodic redesigns. Understanding the ILS is key for anyone interested in trading or investing in Israel. This comprehensive guide will provide an overview of the Israeli new shekel, its history, current valuation against other major world currencies, exchange rate policy, factors that determine the shekel’s strength, and ways to invest or make payments denominated in ILS.

History and Overview of the Israeli New Shekel

The new shekel was first issued on September 4, 1985 to replace the Israeli lira which had suffered from hyperinflation. The shekel was equivalent to 1,000 lira and took its name from the ancient shekel used in antiquity. When the shekel was introduced, it was pegged to a basket of currencies including the U.S. dollar, British pound, and deutsche mark.

From 1985 to 2005, the old shekel was used alongside the new shekel. The old shekel was devalued numerous times before being retired in 2005 when the new shekel became the sole official currency. Since then, the new shekel has been reissued in two subsequent series in 1999 and 2017 with new designs and enhanced security features. However, the currency has retained the “new shekel” name and ILS symbol.

ILS Exchange Rate History

After being pegged initially, the shekel was allowed to float and find its value against other currencies starting in the 1990s. The shekel strengthened considerably through the late 90s and early 2000s as Israel’s economy grew. By 2010, the shekel reached a 15-year high against the U.S. dollar. From 2014 to early 2015, the shekel hit historic highs, reaching 3.2 per dollar.

However, strength of the shekel became a concern, so the Bank of Israel stepped in to weaken the currency through foreign currency purchases. This led to depreciation of the shekel from 3.2 to 3.9 per dollar. The shekel has since fluctuated between 3.4 to 3.8 per dollar based on Israel’s economic outlook, inflation, interest rates, and global conditions.

ILS Denominations and Design

ILS banknotes come in denominations of 20, 50, 100, and 200. The main colors are purple, red, green, and brown respectively. Banknotes have portraits of Israeli cultural figures as well as images of Israeli landmarks. Coin denominations are 10 agorot, 1/2 new shekel, 1 new shekel, 2 new shekel, 5 new shekel, and 10 new shekel.

As of 2020, the current series in circulation is the Series 2017, which introduced new anti-counterfeiting features like a transparent window and enhanced digital watermarks. The Bank of Israel occasionally releases special commemorative coins as legal tender. Overall, the shekel incorporates state-of-the-art security comparable to other major currencies like the euro to maintain confidence domestically and internationally.

ILS Exchange Rates and Performance Against Other Currencies

The Israeli new shekel trades actively on forex markets and its value is driven by economic factors within Israel along with global financial conditions. Here is an overview of how the ILS has performed in recent years against major currencies like the U.S. dollar, euro, British pound, Japanese yen, and others.

ILS/USD Exchange Rate

The USD/ILS exchange rate has averaged around 3.5 over the past decade, meaning it takes about 3.5 shekels to buy 1 U.S. dollar. However, there have been periods of strength and weakness. The shekel reached nearly 4 per dollar in mid-2015 before recovering to around 3.2 in early 2017. It gradually depreciated to 3.7 by mid-2019 and has remained in the 3.5 to 3.7 range since.

Economic growth, interest rates, inflation, monetary policy divergence, geopolitics, and safe haven flows impact USD/ILS. Given the shekel’s volatility, the pair presents trading opportunities for forex traders. Strong technical levels to watch include the 2019 high near 3.63 and 2020 low near 3.36.

ILS/EUR Exchange Rate

The euro only began trading in 1999 but has become one of the shekel’s most important exchange rates. EUR/ILS reached a high above 5 in 2008 then declined steadily, touching a low near 3.9 in 2017. The rate has fluctuated narrowly between 3.9 and 4.2 more recently.

Given Israel’s major trade ties with Europe, EUR/ILS moves based on the relative economic performance of the Eurozone and Israel. The shekel also serves as a proxy for risk appetite, so weaker appetite tends to weigh on EUR/ILS. Monetary policy divergence impacts the rate as well.

ILS/GBP Exchange Rate

ILS/GBP exchange rate dynamics are largely driven by external factors like Bank of England policy, UK economic performance, and Brexit developments rather than Israel-specific factors. The rate has traded between 4.5 and 5.5 over the past decade. The pound hit multi-year highs against the shekel in mid-2022 above 5 before retreating on UK recession fears.

ILS/JPY Exchange Rate

The shekel-yen rate has been in a long-term downtrend as USD/JPY rose and USD/ILS fell over the decades. ILS/JPY is currently around 75% below its 1990 high of nearly 50. Low inflation and slow growth in Japan compared to Israel contributed to yen weakness. Going forward, relative monetary policy stances will determine if this multi-decade downtrend persists.

ILS and Other Currencies

Aside from the above major currencies, the shekel also actively trades against the Canadian dollar, Australian dollar, Swiss franc, Chinese yuan, and many emerging market currencies. ILS generally appreciates against EM currencies during bouts of global risk aversion and vice versa. Traders can take advantage of long, short, or rangebound opportunities on ILS crosses.

ILS Exchange Rate Policy and Interventions

Israel’s exchange rate regime has evolved considerably over the decades. The shekel started with a fixed peg but now floats freely. However, the Bank of Israel maintains the right to intervene occasionally to smooth excessive volatility. Here are some key elements of Israel’s exchange rate policy:

Managed Float Since 2003

In 2003, Israel officially switched to a free-floating exchange rate regime with the Bank of Israel occasionally intervening to prevent “disorderly market conditions”. This transition to a clean float represented a maturation of Israel’s FX policy amid rising global integration.

Rare Interventions to Reduce Shekel Strength

The strong shekel has caused some concerns for Israel’s export competitiveness. When the shekel appreciates too rapidly as it did in 2008-2009 and 2011-2015 periods, the central bank has stepped in to buy foreign currencies to dampen gains. These interventions were rare and only lasted temporarily.

No Official Exchange Rate Target

While not targeting a specific level, the Bank of Israel considers the 3.3 to 3.7 range versus the dollar to be optimal for the economy. If the shekel strays too far outside this band, verbal warnings or interventions become more likely to push it back towards equilibrium.

Interest Rate Differentials Can Prompt Action

Widening interest rate differentials versus major economies like the U.S. or Eurozone may precipitate Bank of Israel action if leading to excessive ILS gains. Policy makers try to ensure rate differentials remain near zero to avoid attracting disruptive speculative flows.

Geopolitical Tensions Sometimes Weigh

During wars, conflicts, or heightened geopolitical tensions, the shekel tends to weaken as investors price in perceived risks. The central bank rarely needs to intervene directly under these circumstances as market forces naturally cause depreciation.

So in summary, Israel now relies primarily on market forces to determine the shekel’s value across currency pairs. But the Bank of Israel remains vigilant and willing to smooth any perceived excess volatility through foreign exchange operations or shifting rhetoric.

What Impacts the Value of the Israeli Shekel?

Many complex factors interact to determine the ultimate exchange rate value of the Israeli shekel versus other global currencies. Here are some of the most important drivers:

Israel’s Economic Performance

Israel has transitioned into a high-tech, developed economy. Strong Israeli growth, supported by tech and exports, generally boosts the shekel by attracting investment flows. Meanwhile, weaker GDP expansion weighs on the currency by dulling its interest rate advantage.

Inflation and Interest Rates

As with other currencies, Israeli monetary policy significantly impacts the shekel. Rising inflation often erodes the shekel’s value unless met with proportionate rate hikes. Higher Israeli interest rates versus other countries make the shekel more attractive for carry trades.

Trade and Current Account Position

Israel runs persistent current account surpluses, supporting shekel strength. However, surpluses are modest so this is a secondary factor compared to growth, rates, and risk appetite. Deterioration of the trade balance tends to pressure the shekel lower over time.

Risk Appetite and Safe Haven Flows

In times of market stress, the shekel weakens along with other risk assets as investors flee to safe havens like the U.S. dollar. However, the impact is milder compared to typical emerging market currencies since Israel is viewed as relatively stable.

Global Commodity Prices

As a net oil importer, the shekel tends to move inversely with crude prices. When oil prices rise, it weighs modestly on Israel’s trade balance and the currency. Natural gas exports are becoming more material for Israel and support the shekel.

Geopolitical Developments

Geopolitical tensions with Iran, Palestinians, and other neighbors occasionally erode the shekel’s value due to risk premiums. However, investors are somewhat numb to daily frictions. Only large-scale conflict would materially impact the currency for more than briefly.

Foreign Institutional Investment

Foreign appetite for Israeli bonds and equities boosts demand for shekels. Institutional investors have increasingly targeted Israeli markets due to solid growth and integrating into global capital markets. This source of inflow supports the currency over time.

So in summary, the shekel strengthens with solid Israeli data, tight policy, strong risk appetite, and foreign inflows. Conversely, it weakens when these drivers fade. But given its free float, the shekel ultimately reflects the balance of global supply and demand.

Investing in Israeli New Shekels

For traders or investors with an interest in Israel or shekel exposure, there are several ways to invest in or make payments using the ILS:

Spot Forex Trading

The most popular method is trading the ILS versus other currencies on the spot forex market. The ability to go long or short allows speculating on shekel moves in either direction. Common pairs include USD/ILS, EUR/ILS and GBP/ILS.

Futures and Options

Beyond spot, there are ILS futures and options contracts trading on the Chicago Mercantile Exchange and some other global exchanges. These allow hedging or speculating on the shekel with added leverage.

Israeli Stocks and Bonds

Purchasing Israeli equities or bonds denominated in shekels provides investment exposure along with currency exposure. Israel has a thriving public stock and bond market accessible to foreigners.

Shekel Deposits

Holding bank deposits denominated in ILS is a straightforward option. This provides interest along with shekel exposure. Deposits hedge against shekel appreciation but lose value if the currency declines.

ETFs and Mutual Funds

Various Israel-focused ETFs and mutual funds have shekel exposure. These provide a diversified way to invest in Israeli assets and the currency simultaneously in a single product.

International Payments and Remittances

Using shekels for payments, money transfers or remittances related to Israel provides natural exposure. As Israel integrates further into the global economy, the use cases for ILS transactions will likely expand.

So in summary, investors have many avenues to add shekel exposure or make use of the currency depending on their objectives, risk tolerance, and other preferences. The ILS provides unique opportunities as Israel continues growing in global economic significance.

Final Thoughts on the Israeli Shekel

The Israeli new shekel has come a long way from the hyperinflation and exchange rate pegs of the 1970s and 1980s. Today, the ILS floats freely and reflects Israel’s diverse, dynamic economy. While not completely free from intervention, the shekel predominately moves based on market forces. This makes the currency highly responsive to economic and geopolitical conditions in Israel and globally.

For currency traders and investors, the Israeli shekel provides an attractive opportunity. Ongoing liberalization and integration with global markets ensure reasonable liquidity and efficient price discovery across ILS pairs. Given Israel’s growth profile and central bank policy diverging from developed markets, the shekel may continue appreciating over the long run but with plenty of volatility to exploit along the way. By understanding what impacts the shekel and how to access it, investors can intelligently incorporate the ILS into their broader portfolio strategies. So for those seeking currency exposure beyond just the majors, be sure to keep the Israeli new shekel on your radar.