The Falling Dollar - Where to Now?

The shekel exchange rate to the U.S. dollar is a result of two, unrelated forces. At times they offset each other, at times they exacerbate each other. The first is the strength of the dollar among currencies worldwide. When currency traders around the world become skeptical of the U.S. economy, or of the willingness of China or Japan to continue buying dollars, the currency weakens all over the world.

The second is the flow of the greenback to and from Israel. When more foreign currency pours into Israel than out, regardless of the type of currency (because all foreign currency is converted to dollars), the dollar exchange rate drops. It's a simple matter of supply and demand. Billions of dollars have flowed into Israel over the past few months from foreign investors. They are buying everything: stocks, bonds, shekels, private companies, start-ups and real estate. This flow explains up to 40 percent of the revaluation of the shekel against the dollar.

What comes next? Experts forecast that the dollar will continue to weaken in international markets by another 10 percent by the end of 2008. But experience has shown that it is nearly impossible to predict the timing or the degree. It is easier to predict the flow of foreign currency to Israel. Because Israel's economy is the fastest growing in the west, it will continue to enjoy foreign investment and an inflow of foreign currency. Even if interest rates decrease a little, the inflow will continue as long as there is responsible economic management, and not another war.