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Prime Minister Ariel Sharon tried to calm the markets yesterday as the dollar crept ever nearer to a new high of NIS 5. "I believe in the Israeli economy," he said, "Israel has a healthy economy but we are temporarily in a setback. I trust the shekel, I believe in it."

The representative rate for the dollar, which is taken at around noon each day, was set at NIS 4.968 yesterday, a 0.5 percent weakening of the shekel on the day. What lies behind it all?

To announce a sharp 1 percent rise in the rate of borrowing, central bank governor David Klein called a news conference to explain why, despite the difficult economic times, he had to raise the interest rate. This will impact, not least, on those with overdrafts and mortgages.

Are other factors to blame for the higher dollar?

Yes, the wave of terror attacks in recent days does not reflect well on the government's defense strategy, and investors are worried. In addition, the macroeconomic policies of the government have failed to wow the credit rating agencies that rank nations according to their creditworthiness. The emergency economic plan, which passed its first reading in Knesset only on its second attempt, is now hacking its way through the Knesset committee stage.

A higher interest rate alone is not sufficient to bring the dollar down. While Klein has stated categorically that he will not flinch in raising the interest further to keep inflation within its target range (or not far from it, as it is expected to overshoot the 3 percent target for 2002), ultimately the market has lost faith in the government's policies, and that is what the markets are calling to be restored.