The shekel-dollar exchange rate is influenced by two unrelated forces, which at times counter each other, and at other times, amplify each other.
One is the strength of the dollar in internationa;l markets. When currency traders around the world feel skeptical about the U.S. economy, or wonder whether the Chinese and Japanese Japan will continue buying dollars, the dollar weakens worldwide, and generally, here too.
The second is the flow of the greenback to and from Israel. When the influx of foreign currency is greater than the outflow (all foreign currency is converted to dollars), the dollar's local exchange rate drops.
It's a matter of supply and demand. Billions of dollars have streamed into Israel over the past few months from foreign investors. They are buying everything: stocks, bonds, shekels, private companies, startups and real estate. This flow explains up to 40% of the shekel's appreciation against the dollar.
Experts forecast that the dollar will continue to weaken in international markets by another 10% by the end of 2008. But in truth, it's impossible to predict timing or degree in the FX arena.
It is possible to predict the flow of foreign currency to Israel. Because Israel's economy is among the fastest-growing in the west, it will continue to enjoy foreign investment and an influx of foreign currency. Even if interest rates drop even more, the inflow will continue - as long as we have responsible economic management, and no more war.
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