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The scope of foreign bank and investor activity on the local currency market has increased sharply over the past three months, peaking since the end of the war in Iraq, according to the managers of currency dealing rooms at the banks.

The foreigners' greater involvement in the shekel-dollar arena is evident in activity data collated by the Bank of Israel: Since the beginning of May, foreign banks have traded a daily average $193 million, about 20 percent of the total currency market activity. This is a larger cut than that of the local banks, whose currency activities average $163 million per day, or 16 percent of the market. Corporate trading is responsible for the rest of the currency trade in Israel.

The total average daily turnover in the shekel-dollar arena has been about $1 billion in May, which includes only actual currency trading, not "swap" deals or options futures.

This volume of trade is a higher level than the average daily volumes in preceding months: $670 million in holiday-laden April, $825 million in March and $783 million in February.

Dealers reported a confined conflict last week among a number of foreign banks that had purchased put options on the dollar, and the Israeli banks that sold the options. The exercise price for those options was around NIS 4.5, so foreign banks preferred to see the shekel gaining ground beyond that point, while the Israeli banks preferred to see the U.S. currency trading stronger.

Local dealing rooms reported that foreign interest multiplied as a result of the perceived reduction in Israel's risk factor after the war in Iraq. Israel, like a number of other countries, offers foreign banks high yields on money market investments compared to the tiny yield available in the U.S. and Europe now.

The foreign banks operating in Israel are mostly large commercial banks such as Citibank, Deutsche Bank and Barclay's, as well as investment banks such as Goldman Sachs and Lehman Brothers, which increased their involvement in Israeli money markets in the past year.

These banks act on their own behalf, but no less for their clients - mostly hedge funds seeking surplus yields by investing in emerging markets. The foreign banks' activity is usually conducted directly from their dealing rooms abroad, with the exception of a few foreign banks that operate dealing rooms in Tel Aviv, such as Deutsche Bank, HSBC and Citibank. In contrast to investments in stocks or bonds, most players on the money and currency markets are considered speculators, gambling on capital gains or closing positions when they feel the profit potential has been exhausted or the risk-expected yield ratio is moving against them.

Traders at local banks say they are not surprised by the increase in the foreign banks' activity, and estimated that the rate of involvement will increase consistently in the coming years, particularly if they consider Israel a safe place to invest.

One manager of a local dealing room said the foreign banks' activity on the local currency market, operating from their London dealing rooms, could account for 50 percent of the total shekel-dollar trade in a matter of just a few years. This phenomenon is not unique to Israel, and in many countries, particularly developing nations such as Poland and Hungary, a great deal of the currency trade is conducted by foreign banks from their London facilities.