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The Bank of Israel started buying up large amounts of dollars at about 3 P.M. yesterday and was believed to have acquired about $250 million before the representative rate of exchange was set at NIS 3.74 to the dollar (up 0.56% from yesterday) some 30 minutes later.

The dollar continued to strengthen after the rate was set and stood at NIS 3.76 at the close of trade yesterday, regaining the 0.3% it lost since the morning hours.

A top foreign currency trader reported that foreign investors sold off unusually large amounts of dollars, particularly as the currency began to regain ground. Foreign investors who purchased dollars at NIS 3.78 last week are said to have taken advantage of the central bank's intervention yesterday to close out their positions.

According to one assessment, the central bank's motivation for intervening in the foreign currency market is to maintain the value of a basket of currencies known as the nominal effective exchange rate at a minimum level of 92 points. The basket is a weighted average of 28 foreign currencies of 38 nations - Israel's main trade partners - and measured against the shekel. The relative weight of each country in the basket is based on the extent of trade with Israel, adjusted for inflation. Since September 8, the basket has traded at slightly above 92 points, and on Tuesday neared 92.1 points.

The dollar has slowly weakened by 1% over the past week, in keeping with the creeping devaluation of the U.S. currency worldwide. The sinking dollar poses a difficulty primarily to exporters, who are seeing less shekel revenue for every dollar paid into their coffers. A senior economic source said on Tuesday the government is planning an exchange rate insurance plan for small and mid-sized exporters, which should be ready within months.

The Finance Ministry is considering another means to contribute to a solution for the overheated shekel. Deputy Finance Minister Yitzhak Cohen said yesterday the treasury is weighing encouragement of institutional investors to invest overseas. Such a policy, he says, would simultaneously address two needs - reining in the strengthening shekel by stimulating demand for foreign currency and encouraging institutional investors to spread themselves worldwide, thereby reducing the risk to pension savings here.

Cohen declined to elaborate how exactly the government will encourage institutional investors as the overseas option is already available to them. Cohen said it would be preferable to issuing subsidized insurance to exporters, a plan that has raised objections among ministry experts as posing unfair competition to the private sector, mainly banks, which sell such protective instruments. Such subsidies could also lead exporters to acquire the insurance unnecessarily.