Why the Shekel Is Strengthening Despite the Iran Conflict

The Counterintuitive Rally

On February 28, 2026, the US and Israel launched joint strikes on Iran under Operation Roaring Lion. The conventional playbook says the shekel should weaken on geopolitical risk. Instead, USD/ILS is trading at roughly 3.14, the shekel is up about 3% year-to-date against the dollar, and the currency is sitting comfortably within its recent 3.09-3.23 range.

Meanwhile, gold is up 22% YTD. The VIX is up 33%. Global risk assets are clearly pricing in uncertainty. So why is the shekel ignoring the script?

Four Factors Keeping the Shekel Strong

1. US Co-Belligerence Changes the Risk Calculus

This is not October 2023. Unlike the Gaza conflict where Israel operated more independently, Operation Roaring Lion is a joint US-Israel campaign. Markets read US military involvement as an implicit sovereign guarantee, which reduces perceived risk rather than increasing it.

When the world’s largest economy is actively backing your military operations, the calculus for currency traders changes. Capital flight that might have happened in a unilateral conflict gets offset by the signal that the US is fully committed.

2. Tech Sector Inflows Create Structural Support

Israel’s technology and cybersecurity sector generates billions in foreign currency inflows annually:

Tech exports and services (software, cyber, cloud infrastructure)
Foreign direct investment and VC funding
M&A activity as global companies acquire Israeli startups

These USD-to-ILS flows create constant upward pressure on the shekel that currently outweighs conflict-driven capital flight. Japan Times reported in late February that the sector is in “recovery mode” with robust growth projections despite the broader conflict.

For treasury teams managing ILS exposure, this is the structural factor that matters most. It’s not going away with a ceasefire or an escalation. It’s a permanent feature of the Israeli economy.

3. Bank of Israel Monetary Policy

The BoI held rates at 4.5% on February 24, choosing not to cut despite growth concerns. Three things to watch:

High rates attract carry trade flows from lower-yield currencies
$200B+ in FX reserves means the BoI can and will intervene to prevent excessive volatility
The hold signal tells markets the central bank prioritizes stability over stimulus

Economists expect gradual cuts to 3%-3.25% by end of 2026, but only if the conflict stays contained. Any escalation likely means rates stay higher for longer, which paradoxically supports the shekel further.

4. Iranian Rial Collapse Creates Relative Strength

The Iranian rial has lost roughly 30% of its value since early 2026, with open market rates crashing from around 430K to 1.7M per USD. In relative terms, the shekel’s stability looks even more impressive, reinforcing investor confidence.

The combination of US backing, structural tech inflows, tight monetary policy, and Iranian currency collapse creates a paradoxical situation where military conflict is actually supporting the shekel rather than weakening it.

Three Scenarios to Plan For

Contained Operation (60% probability)

USD/ILS stays in the 3.05-3.20 range. The BoI begins gradual rate cuts mid-2026. Business as usual for treasury operations. This is the base case, and the most likely outcome based on current market pricing.

Regional Escalation (25% probability)

Iran retaliates against oil infrastructure or shipping lanes. Oil spikes above $100. Global risk-off sentiment pushes USD/ILS to 3.40-3.60. The BoI responds with emergency rate hikes. Companies with ILS payroll would actually benefit from the weaker shekel on conversions, but face operational disruption risk.

Prolonged Conflict (15% probability)

A multi-month campaign where Israeli tech companies begin relocating operations. Sustained capital outflows push USD/ILS above 3.50. Credit rating agencies start making noise. This is the tail risk scenario that requires contingency planning.

What Treasury Teams Should Do

This Week

Monitor the 5-7 day pattern. The first week of trading after a geopolitical shock sets the narrative. If USD/ILS holds 3.10-3.20 through this week, the “contained” thesis wins.

Consider timing on large conversions. If you’re converting USD to ILS for payroll or vendor payments and can wait a few days, the shekel could move in your favor if the delayed weakening thesis plays out. Don’t bet the farm on it, but don’t rush either.

Next 30 Days

Explore forward contracts at current rates. If you have known ILS obligations over the next 90 days (payroll, rent, vendors), forward contracts lock in today’s strong shekel. If the currency weakens, those contracts become valuable. The cost is typically just the interest rate differential.

Set rate alerts at 3.25 and 3.35. These are your escalation triggers. USD/ILS crossing 3.25 means the contained narrative is failing. At 3.35, you’re in Scenario B territory and should accelerate conversions.

Strategic

Build natural hedges. If you have both ILS revenue and ILS costs, match them. Stop round-tripping through USD unnecessarily. Every conversion carries a spread, and natural hedges cost nothing.

Model your exposure. Run your P&L at 3.10, 3.25, and 3.50 ILS/USD. Know your exposure before the market moves, not after. The companies that handle FX shocks well are the ones that already know their numbers.

The Bottom Line

The base case is stability. The shekel’s structural supports are strong enough to absorb the current conflict. But the tail risks are real and worth planning for.

Treasury teams with ILS exposure should use this window to lock in favorable rates on known obligations, set up monitoring for the escalation triggers, and make sure they actually have an FX policy rather than converting currencies by gut feel.

The worst time to figure out your FX strategy is when the market is already moving against you.

This analysis is for informational purposes only and does not constitute financial advice. Currency markets carry inherent risk. Consult your financial advisor before executing hedging strategies.