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The Governor of the Bank of Israel, Stanley Fischer, is looking to end the bank's intervention in the foreign currency market in a judicious manner that will not result in a backlash and a renewed appreciation of the shekel against the dollar. The assumption is that the central bank will gradually decrease its intervention, from its current $100 million a day back down to the $25 million a day of a few months ago.

Market watchers expect the decline in BoI activity to begin within a few weeks, in parallel with the predicted rise in devaluationary pressures toward the end of the year. Under the current situation, bank officials admit, their involvement in the foreign currency market should be considered interventionary - that is, activity that affects the shekel exchange rate (creating devaluation). As such, it violates the central bank's original aim when it began operating in the foreign currency market a few months ago, in an effort to build up Israel's forex reserves by $10 billion without affecting the shekel exchange rate.

The bank had reduced its foreign currency trading to $25 million a day, which it claimed barely affected market prices, but in early July, in the wake of the shekel's sharp appreciation, it stepped up its intervention to a rate of $100 million a day. The aim of the intervention changed from storing up foreign currency reservers to weakening the shekel.

The goal was attained, and the dollar recovered, from about NIS 3.2 to about NIS 3.55, but for the Bank of Israel it was at the price of becoming the player in the market who calls the shots - and the fact that it could not just up and leave. That leaves the bank in the position of having to move carefully in leaving the market, so as not to set off a renewed appreciation of the shekel.

That's where the forecasts of a phased return to the $25-million-a-day rate come in, in a process expected to take until the end of the year. By then the bank expects the forex market to undergo a change involving depreciatory pressure on the shekel. The bank believes that until the end of 2008 the global recession will cause a decline in Israeli exports and a rise in the amount of money Israelis send out of the country. Taken together, these will cause downward pressure on the shekel that will help the central bank to wean itself off its interventionary actions.