Israeli exporters earning in USD but paying expenses in ILS face significant FX risk: a stronger shekel reduces the local value of their dollar revenues. In 2025–2026, the shekel reached multi-decade highs due to strong tech exports and foreign investment, cutting profits for dollar-based firms by double digits. Companies should assess their net USD exposure (income minus liabilities) and consider hedging tools such as forwards, options, swaps, or multicurrency debt, each with different costs and uses. Effective FX management requires clear policies, oversight, and monitoring. ERB, with 30 years of experience supporting Israeli and multinational firms, is well suited to advise on these strategies.

FX Exposure with USD Revenue and ILS Expenses

Israeli companies conducting business in US Dollars and their costs in Shekels are exposed to flow FX risk. Because of this, a strong Shekel against the US Dollar may lead to lower revenues in US Dollar Terms and hence lower margins. For instance, some companies operating profits were reduced because of the appreciation of the Shekel by approximately 16%. For example, it was estimated that an early-stage technology firm that raised $100 million was able to purchase $13.5 million less due to FX basis shifts. Companies will calculate the cumulative net FX Exposure (Total Inflows of US Dollar Compared to Total Outflows of US Dollar) as part of their overall management of FX risks. For companies that do not have hedge accounting, the impact of any FX gain/ loss will be recognized as P&L from operations in accordance with IFRS; however; the taxable status of an FX gain/loss will generally be classified as ordinary income by the Israeli tax authority.

In general, there are no currency exchange controls on companies in Israel; since 2002 foreign currency transactions have been fully liberalized; companies can convert currencies and maintain foreign currency accounts without restriction, except for standard reporting requirements on large transactions.

USD/ILS Trends and Drivers (2024–2026)

Since early 2024 the shekel has been unusually strong. By April 2026 the USD/ILS rate briefly dipped below ₪3.00 (the first such occurrence since 1995). From roughly ₪3.70 per dollar in April 2025 to ≈₪3.00 by spring 2026 is about a 16% drop in the dollar’s value. Major drivers include:

1. Capital inflows: Israeli tech exports and foreign investment have poured dollars into the economy. As one report notes, “large volumes of dollars… particularly through investments in high-tech and industry, are converted into shekels, strengthening the local currency.” Foreign direct investment soared (~$39 billion in 2025 vs. $25 billion in 2024), forcing conversion.
2. Global dollar weakness: Geopolitical and macro factors (e.g. US–Iran tensions, global USD moves) also played a role. The US dollar was broadly weakening in 2025–26, further aided by Israeli-specific flows.
3. Institutional hedging demand: Israeli pension and investment funds buying foreign assets have hedged their USD exposures (e.g. by selling dollars forward), which increases demand for shekels and adds to currency strength.
4. Monetary policy and markets: Israel’s floating exchange rate means no central targeting of the FX rate. While some exporters have urged Bank of Israel intervention, the central bank has stressed it will not use interest rates to defend

Measuring Exposure; Accounting and Tax Considerations

Companies should quantify FX exposure by forecasting currency-based cash flows, typically measuring their net USD position (USD revenues minus USD costs or obligations). Many use tools like Value-at-Risk (Var) or scenario analysis to estimate profit impact-for example, a 16% USD decline can reduce profits by a similar margin.

Accounting: Under IFRS (IAS 39/IFRS 9), hedge gains/losses can be deferred if strict criteria are met; otherwise, they are recognized in profit and loss. Israeli public companies follow IFRS without major local deviations.

Tax: FX gains/losses on operations are generally treated as taxable income or deductible expenses at the corporate rate (~23%). While most are included as ordinary income, some capital-related FX gains may follow different rules. Clear documentation and guidance from the Israel Tax Authority are recommended.

Regulation: Israel does not restrict corporate FX hedging. Companies may freely use instruments like forwards, swaps, and options through banks, which follow standard supervision rules, while regulators encourage-but do not mandate-risk management practices.

Hedging Instruments for Israeli Companies

Israeli firms can use a variety of hedging tools:

1. FX Forward Contracts: An OTC agreement to exchange dollars for shekels at a fixed rate on a future date. No upfront premium is paid, but the forward rate includes the interest-rate differential. Pros: Simple, locks in rates exactly. Cons: Obligation to transact even if market moves favourably; liquidity depends on counterparty credit. Typical cost: Built into forward points (often 0–3% of notional, depending on rate gap). Forwards are widely used by exporters for 1–24-month horizons.
2. FX Options: Gives the right (not obligation) to buy/sell USD at a set strike. Requires paying an upfront premium (cost typically 1–3% of the notional depending on volatility and term). Pros: Downside protected with upside potential if USD moves favourably. Cons: Premium is “sunk cost” if option expires unexercised, and options can be less liquid. Often used for 6–12 month covers when preserving optionality is important.
3. Natural Hedges: Adjusting business operations to offset currency risk, e.g. incurring more USD costs or raising USD debt to match USD revenue, or invoicing local currency to some degree. Pros: No financial cost aside from possibly higher real costs; aligns cash flows. Cons: Often imperfect and may conflict with other goals (e.g. raising all foreign capital in USD is hard for Israeli startups). Natural hedges are a complementary strategy rather than a full solution.
4. FX Swaps: Effectively a simultaneous forward and spot, commonly used for short-term liquidity (e.g. borrowing USD today and repaying in shekels later). Pros: Highly liquid in interbank market for short tenors (days to 1 year). Cons: Like forwards, it locks in a rate (via the swap rate) and usually has little explicit cost beyond interest differential.
5. Multicurrency Debt or Loans: Borrowing in USD (or another hard currency) so that servicing is matched to USD inflows. Pros: Natural structural hedge for long-term projects; interest may be fixed. Cons: USD interest rates or yields may be higher; exposes firm to currency risk on principal repayment unless hedged separately. Typically used for long-term financing needs (e.g. capital expenditures).

Operational Implementation and Governance

Effective FX risk management requires clear policy and processes. Companies should:

1. Establish an FX policy: Define which exposures to hedge (e.g. 100% of forecasted net USD flows), who is authorized to execute transactions (treasury manager, CFO), and reporting lines. This policy should be approved by senior management or the Board.
2. Daily Risk Monitoring: Treasury teams track current exposures and mark-to-market any derivatives. They report daily/weekly FX positions against policy limits.
3. Counterparty and Documentation: Use reputable financial institutions for forwards/options. Negotiate master agreements (ISDA) and ensure legal review. Keep proper documentation to qualify for hedge accounting if desired.
4. Collateral and Margin: Maintain funding or collateral lines for swaps/options as required by counterparties.
5. Periodic Review: Update forecasts and hedges regularly. Adjust the hedged percentage as budgets or market views change. Annual reviews of the FX strategy by the Board or audit committee are advised.
6. Accounting and Tax Coordination: Work with finance and tax teams to treat hedging results correctly in financial reports and tax filings.

Illustrative Scenarios

Recent data demonstrates that the effects of the USD/ILS currency fluctuations are causing an immediate effect. For example, a report in Globes states that Israeli tech firms have “seen their cash reserves”-which are in dollars- “eroded by 15-20% over one year from currency fluctuations only.” In another survey, 46% of manufacturers said that foreign exchange gains do not equal their foreign currency losses. As a further example, in one scenario a tech start-up that raised USD$100,000,000 from financing would have lost USD$13,500,000 of their value due to only FX losses within one year. These examples show why hedging is essential; if the startup used a forward exchange contract or purchased an option, they likely would have prevented most of this loss from occurring.

Some businesses may also take advantage of tailwinds; as an example, through natural hedges, businesses that pay some expenses in dollars or export cash back can offset their losses partially. As examples, an export company could give a somewhat higher price in dollars or time their receipts of payments to help offset losses. Often, the operational changes complement the financial hedge rather than provide a replacement for the financial hedging technique.

Best Practices & Governance Checklist

1. Formal Policy: Written FX policy approved by senior management.
2. Segregation of Duties: Separate FX-dealing authority from accounting/auditing.
3. Risk Limits: Set maximum net exposure or loss thresholds (e.g. value-at-risk limits).
4. Documentation: Keep IFRS-compliant records of hedges.
5. Qualified Counterparties: Use banks with strong credit and regulatory compliance (e.g. well-established Israeli or global banks).
6. Regular Reporting: Treasury should report realized and unrealized FX gains/losses monthly to the CFO and Board.
7. Audit and Review: Include FX risk procedures in internal/external audits. Adjust policy if market or business changes.

FAQ

 What exactly is my company’s FX exposure if we earn in dollars and spend in shekels?
Your net exposure is essentially your USD revenues minus any USD costs or debt payments. If you have no USD debts or imports, a 100% exposure means every 1% change in USD/ILS moves your shekel profit by ~1% in the opposite direction. For example, a firm earning $1M with NIS 3M costs would see ~NIS 480,000 less in profit if USD/ILS falls 16%.

 How have recent FX moves affected Israeli exporters?

 The sharp rise of the shekel (USD/ILS falling below 3) has already reduced exporters’ revenues significantly. In one report, companies described a 16% drop in the dollar equating to a 16% hit to profits. Many are now feeling pressure on margins, with some delaying investments or moving production due to the weaker dollar.

Can we simply buy US dollars and hold them to hedge?

 Holding USD cash is a form of hedge, but unhedged FX positions still count as exposure, and any translation gain/loss is taxable income. Also, large currency holdings must be managed carefully (e.g. reported under Israel’s foreign currency regulations). Financial hedging (forwards/options) is more precise because it locks in rates without requiring large cash buffers.

 Does Israeli regulation restrict corporate hedging?
No. Israel has a fully liberalized FX regime. All major exchange controls were abolished in the 1990s. Today companies are free to trade FX derivatives and borrow/lend in foreign currencies through authorized banks, subject only to normal banking and tax rules.