The shekel is trading just above NIS 2.80 to the dollar, its strongest in years. On the eve of the October 2023 war the rate hovered near NIS 3.8. The currency has gained more than a quarter against the dollar since, and the move shows no sign of reversing. Exporters call it a threat. The Bank of Israel treats it as an inflation problem. One label rarely reaches the Israeli conversation, though it fits more closely than either: Dutch disease. The term is a fixture of analysis on petro-states and resource exporters, yet it is seldom applied to Israel, even now, with the shekel near record strength and gas output at an all-time high. The rare exception came from the central bank itself, more than a decade ago, and was quietly dropped.
Where the term comes from
In 1959 the Netherlands discovered the Groningen field, one of the largest natural gas reservoirs in Europe. Exports followed, and foreign currency poured in. The guilder appreciated. Dutch manufacturing, which had to sell its output abroad in a now-expensive currency, lost competitiveness and contracted. A resource windfall had hollowed out the very industries that were supposed to anchor the economy. In 1977 The Economist named the phenomenon Dutch disease, and the term stuck.
The mechanism is not complicated. A surge of foreign currency, whether from oil, gas, or any concentrated export, pushes up the exchange rate. A stronger currency makes everything a country sells abroad more expensive and everything it buys cheaper. The resource sector thrives, because it is selling a commodity priced globally and indifferent to the local currency. The tradable sector that competes on margins, chiefly manufacturing, is squeezed until it relocates or dies. The economy ends up richer on paper and narrower in practice, dependent on a single revenue stream that will eventually deplete.
The diagnosis Israel made and forgot
Israel has its own gas story, and it is now a large one. The offshore Tamar and Leviathan fields, discovered around 2009 and 2010, turned a chronic energy importer into a regional exporter. In 2026 the country is on track for record production, with combined output pushing past three billion cubic feet per day for the first time. In January the Leviathan partners took a $2.36bn final investment decision to lift the field’s annual capacity by roughly thirty percent. Behind it sits the largest export agreement in Israel’s history: a $35bn deal to supply Egypt with around 130 billion cubic meters of gas through 2040.
The central bank saw the currency consequences coming. In 2013, as Tamar came online, the Bank of Israel announced a foreign exchange purchase program built explicitly to offset the effect of gas production on the exchange rate. It stated the logic without euphemism: gas was improving the current account, the improvement was generating appreciation pressure, and the result, often called Dutch disease, could harm the wider economy. Few central banks name the condition and pre-commit to fighting it. Israel did, and then the phrase fell out of the conversation. It has barely surfaced since, even as the shekel has climbed to levels that would once have triggered alarm.
The correction the label needs
Here the textbook diagnosis has to be amended, because gas is not why the shekel is this strong. As a share of the inflows lifting the currency, it is close to a rounding error. The real drivers are technology and defense, and the numbers are not close.
High-tech now accounts for somewhere between 55 and 60 percent of Israel’s total exports. High-tech services alone, the software, cybersecurity, cloud, artificial intelligence, and contract research sold to multinationals, ran to roughly $52bn in 2023 and kept expanding through 2024 even as global goods trade softened. Defense is the second engine. Exports hit a record of about $14.7bn in 2024, the fourth consecutive annual record, having more than doubled over five years, with more than half the deals going to European militaries rearming after 2022. Set against these flows, gas export revenue of a couple of billion dollars a year is a minor line. The dollars that make the shekel expensive are earned in code and missiles, not in cubic meters.
The conversion mechanics compound it. Israeli institutional investors hold vast foreign equity portfolios, and for years the shekel has tracked the S&P 500 almost in lockstep: when global markets rise, the institutions hedge by selling dollars and buying shekels. Tech firms convert investment dollars into shekels to pay local salaries. Defense contractors and gas partners do the same with export receipts. The shekel is strong because the world wants to own a slice of Israeli technology, Israeli weapons, and the resilient economy behind them. That is not a single-commodity affliction. It is a diversified appreciation, and it has no obvious ceiling.
Why the symptoms are real regardless
The cause is misattributed, but the damage is not imaginary, and this is where the Dutch disease framing earns its place. Exporters earn revenue in dollars and euros while paying wages and operating costs in shekels. As the currency strengthens, foreign earnings translate into fewer shekels and margins compress even when demand holds steady. Manufacturers have begun to act on it, shifting production closer to customers and to lower-cost labor markets, hedging currency risk in the process. The president of the Manufacturers’ Association has warned that the exchange rate is now a decisive factor in where firms choose to invest, across both industry and technology.
The central bank faces the mirror image of that pressure. A shekel near NIS 2.80 drags down the price of imported goods, and tradable-goods inflation, more than a third of the consumer price index, is already close to zero. Push the currency much further and inflation risks falling below the lower bound of the bank’s one-to-three-percent target. That is part of why it has cut interest rates three times in 2026. A currency strong enough to import disinflation can force a central bank to ease into an economy that does not otherwise need easing.
The diagnosis worth reviving
Israel does not have Dutch disease in the strict sense. It has a success disease, an appreciation driven by broad-based confidence in its technology and its defense industry rather than by a single extractive windfall. But the distinction offers less comfort than it sounds. Tech and capital flows are cyclical; they can turn with the next global selloff. Gas cannot. It is the one inflow set to grow structurally for the next fifteen years, locked in by a $35bn contract and a field expansion already financed. As that stream scales, it will steadily add a hard commodity core to a currency that has so far floated on softer money. The label looks loose today only because the most volatile drivers are masking the most permanent one. The Bank of Israel named the risk in 2013 and then stopped saying the words. The conditions did not stop arriving.