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The Government Pension Fund of Norway, which is actually one of the world's largest sovereign wealth funds managing over 270 billion euros, has decided recently to invest over half a billion euros in Israel.

The Government Pension Fund - Global, is where the Norwegian government invests its surplus oil wealth for future generations, and was better known by its previous name, The Petroleum Fund of Norway. It invests globally.

The fund, managed by Yngve Slyngstad, decided to allocate 0.25% of its holdings for investment in Israel, out of its over 270 billion euros in assets.

The fund has not been having a good year so far in 2008, with a negative return of -5.62% in the first quarter of this year. Last year it showed a 4.26% return. This fund is not actually a pension fund despite the name, but a sovereign wealth fund. There is a second Norwegian state fund, the Government Pension Fund - Norway, with less than 10% of the Global fund's assets, which invests only in Norwegian firms.

The Global fund is supposed to invest according to ethical policies, and does not invest in arms or cigarette manufacturers. It is allowed to invest half of its assets in global stocks.

The shekel's drastic rise over the past year has produced a number of conspiracy theories, one of which is that Arab institutions, including sovereign wealth funds, have teamed up to buy shekels and damage the Israeli economy.

However, the Bank of Israel dismisses such talk.

The central bank has found no evidence of any such theory, and even claims such an attempt would be impossible without leaving signs in the stock or bond markets, or in shekel deposits with the banks.

In other words, the Saudis are not taking over Israeli forex markets. However, the Norwegians are coming. So what is the cause of the shekel's increasing strength? The Bank of Israel feels that the continued rise of the Israeli currency stems from a change in the investment tastes of the Israeli public - and not in investments by foreigners here in Israel.

Israelis have reduced their overseas investments, while foreigners have not let up on their Israeli investments; which has created a huge demand for the shekel and drove its value up, the central bank feels.

Over the past decade, Israelis - both the financial and business sectors - have moved $100 million in assets overseas.

But in 2007 Israelis invested $12 million abroad. At the same time, foreigners invested about the same amount here: in apartments, shares and businesses, but in speculative investments, too. However, the two were basically set off against each other in 2007 and the rise in the shekel last year mostly reflected the changes in the dollar and euro in world markets.

In the first half of 2008 the situation changed. Foreign investors slightly reduced their investments in Israel, while Israelis radically cut down the amounts they sent abroad to about $7-8 billion on an annual basis - compared to about $10-12 billion brought in by foreign investors. The gap, some $3-5 billion, is creating the excess demand for the shekel, and causing it to rise.

The Bank of Israel feels the change in Israeli investment choices is natural considering the strong showing of the Israeli economy .

So what about the bank's daily purchases of $100 million? At that rate, within three months it will meet its declared goal of adding $10 billion to its foreign currency reserves and estimates are it will stop buying. It is possible the treasury will then step in to buy foreign currency instead to reducing Israel's external debt at a reasonable price.

The Bank of Israel and Governor Stanley Fischer are worried about expectations for higher inflation, as reflected recently in bond prices. Expectations for annual inflation have reached 3.5-3.5%, well above this year's target of 1-3%. Therefore, Fischer is considering raising interest rates again at the end of this month by 0.25%, despite a much lower than expected June CPI of 0.1%.