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There is no crueler mirror than the mirror of the exchange rate. Neither is there a faster one. Changes in the growth rate are slow to bear fruit; changes in unemployment also come in more measured fashions; but the exchange rate changes at the speed of lightning, responding immediately to any economic or political act. Changes in the exchange rate are a daily opinion poll that you cannot control, neither through lying, nor with charm; because money talks, and it talks quickly, honestly and without sentiment.

When the Knesset passed the state budget last Wednesday, many believed that the approved financial framework would bring a halt to the dollar's gallop. Last Wednesday, however, the dollar stood at NIS 4.633, and it continued to rise, reaching a rate of NIS 4.744 yesterday. Why?

* The interest rate: On December 10, 2001, the dollar stood at NIS 4.220. On that day, reports that the governor of the Bank of Israel, David Klein, was about to significantly cut the interest rate began to surface, and the dollar began to inch its way up. Since then, the shekel has depreciated 12.4 percent, with the public shifting its portfolio dramatically - more dollars and fewer shekels.

* Lack of confidence: As an expression of the public's sweeping lack of faith in its economic leaders, the dollar went on climbing even after the budget was passed. The economic leaders promised, but failed to deliver their promises, presenting the public with a bad budget that encourages those who do not work, instead of one that deals with growth and employment. As a result, the public believes that the economy will grow this year by less than the global rate, so the state of the economy will get worse and the currency will become weaker.

* A false budget: Based on tax revenues in January, this year will see a sharp fall in income from taxes with the government expected to find itself short of about NIS 10 billion. The state reserves have already been used up, and hundreds of millions more have been promised to the disabled. So those that think the budget deficit this year will reach 3 percent of the gross domestic product are mistaken. It will hit 5 percent of the GDP at least; and this means a growing surplus of imports and hence a further depreciation of the shekel.

* Taxes: The finance minister can raise taxes for the middle and upper classes as much as he likes (either by means of an income tax or taxes on cellular telephones), but our economy is an open one and people can vote with their feet, transferring assets and operations abroad and again leading to more depreciation.

* The supply side: The Nasdaq crisis and Israel's security situation have severely hindered the raising of funds abroad and have reduced foreign investments in Israel; hence the supply of foreign currency has also dropped.

Should Klein put the brakes on the depreciation of the shekel by raising interest rates? Not necessarily. While inflation forecasts remain within the acceptable range, as they do today, there is no cause for Klein to take on the depreciation, which is, in fact, a positive phenomenon that encourages economic activity and boosts exports.