shekel dollar 88.
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Even as Israelis marvel at the recent strength of the shekel, some economists believe the currency could hit NIS 4.20 to the dollar by the end of the year, and perhaps even NIS 4.00 per dollar at some point thereafter, due to positive economic factors.
"As long as we have relative calm on the political front [and national security] the shekel will continue to strengthen," Leader & Co. chief economist Jonathan Katz said Thursday.
Among the potential "clouds on the horizon" that could cut the shekel's rise short are a coalition crisis related to the 2007 budget or other matters of contention or regional geopolitical developments involving Iran or Syria, he said, adding that the war in the North or early elections were examples of the kinds of surprises that have derailed forecasts in Israel in the past.
Barring any such crisis, the shekel could hit NIS 4 to the dollar before the markets decide that "this is more or less the fair value of the shekel in real terms," Katz said. However, foreign investors bullish on the shekel may reverse their position in the first quarter of 2007, he said.
The bulk of the shekel's rise against the dollar is indeed due to the shekel's own strength - not the weakening of the dollar - Katz said. Investors are buying shekels and selling foreign currency, while the dollar has been strengthening against the euro, such that the shekel has strengthened more against the Bank of Israel currency basket than against the dollar in the past two weeks, Katz said.
The fact that, since the beginning of the year, the shekel has risen more against the dollar than the currency basket is primarily due to the dollar's weakening in the first half of the year, not more recent developments, he said.
The shekel has been strengthening due to "a combination of elements," including the large and increasing surplus in the current account, continued foreign investment in Israel - including recent purchases of Israeli hi-tech companies - and the sense that more foreign investors are coming back to Israel's bond market "and also probably the stock market as well," now that the war is over and the governing coalition seems more stable, Katz said.
Since Israeli investors are simultaneously keeping their exposure to foreign markets "on hold" - "and actually brought money home in June, July and August due to the collapse of some emerging markets" - more money is coming in than going out, boosting the shekel against other currencies, Katz said.
Excellence Nessuah Chief Economist Shlomo Maoz, on the other hand, predicted that the high shekel against the dollar, as well as the high interest rate, would cause such economic distress that the Bank of Israel would be forced bring down the interest rate.
This would in turn bring the shekel's value back down to NIS 4.6 or NIS 4.65 to the dollar, "but too late" to stop a "significant" rise in unemployment, imports and the deficit, alongside a slowdown in traditional industry, Maoz lamented.
"By keeping the interest rate so high despite a slowdown in economic activity, the Bank of Israel is causing damage to the economy. ... The longer the Bank of Israel takes to bring the interest rate down, the more damage there will be," he said.
Psagot Ofek Chief Economist Vered Dar agreed that in the current circumstances, "the heads of the Bank of Israel absolutely need to begin thinking about reducing the interest rate," since the shekel's rising value in past months has led to a downward correction of inflation forecasts for the coming 12 months, to a level near the bottom of the 1-3% yearly price stability target.
"Surplus" public confidence in the shekel could even bring inflation beneath the target range over the next 12 months, Dar said.
Barring any "surprising turnarounds" in the coming weeks, the Bank of Israel should cut the interest rate by one-quarter percentage point - removing the cushion buffering it from the US interest rate - she said, adding that public expectations of such a move would bring the shekel back to a lower value against the dollar.
According to Dar's analysis, however, NIS 4.3 to the dollar could become the "new 'middle rate'" around which the shekel-dollar rate will fluctuate - instead of the NIS 4.5 per dollar value around which the shekel has been varying steadily over the past few years - "and it is not at all certain that the shekel's turning point will be very soon," she said.
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