Interest Rate Policy Ensures Shekel Stays Firm Against Dollar

In early options trading on Sunday, the shekel continued to strengthen against the U.S. dollar, with a further 1.5 percent drop in the exchange rate. The dollar is currently being traded at NIS 4.7483.

On Friday, the representative dollar exchange rate was set at NIS 4.769, a 1.2 percent gain from Thursday's official daily rate. After the daily rate was set, the shekel continued to gain ground and traded at NIS 4.756.

Since last Monday when Bank of Israel Governor David Klein raised lending rates by 2 percent, the dollar has lost 22 agorot in local currency trading, from NIS 4.982, constituting a 4.5 percent revaluation of the local currency.

Dealing rooms note that the shekel's strength in the past week stemmed primarily from the rate hike and from Klein's determination to fight for the Bank of Israel's goal of price stability.

In the past month, the Bank of Israel has raised lending rates 4.5 percent from 4.6 to 9.1 percent. The rate hikes contributed to a 7.3 percent gap with dollar interest.

In addition, the risk in shekel investments dropped due to the calmer bond market and Klein's policy, so investors preferred shekel investments to dollar-linked alternatives. Month-end corporate currency conversions also boosted shekel strength.

In addition, currency market players anticipate improved cooperation between Finance Minister Silvan Shalom and Klein and cuts in the 2003 budget. The dollar's weakening against the euro, influenced in the past few days by the WorldCom scandal, also helped foreign banks and speculators to adjust dollar positions. Nonetheless, some dealers still predict the shekel could devalue again, and recommend a foreign currency component to investment portfolios.