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Capital market analysts disagreed Thursday on how much higher the shekel would rise against the dollar, as the dollar-shekel rate reached a nearly five-year low of NIS 4.255 per dollar by the early evening.
The last time the shekel was at such a high rate against the dollar was December 2001.
The dollar's drop against the shekel would likely not end at NIS 4.25 per dollar, but could "very quickly" head in "the direction of NIS 4.00, where the next significant support level is found," estimated Finotec Trading Inc. senior currency analyst Yossi Emon early Thursday.
"If [in the past] we said that we are walking on thin ice, then at the moment we are really jumping on [the ice] and cracking it," Emon said, adding that "there starts to be a problem when those sectors priced in dollars begin hurting, like exports and real estate," even if consumers are benefited by lower prices on cars, electrical appliances and other dollar items.
Yoram Gershoni, deputy CEO at the Discount group's Green Bull investment house, however, said the dollar already was reaching the end of its fall against the shekel, and predicted it would stop at NIS 4.25.
Over the next half-year, the dollar will stabilize to about NIS 4.4 or NIS 4.5, Gershoni said.
"It would be reasonable for both [Bank of Israel Governor Stanley Fischer] and the Finance Ministry to make the maximum effort to reach this level," he said, calling it "a national interest."
Leader Capital Markets economists said "There is no doubt that the dollar's plunge against the shekel is a result of an overly restrictive monetary policy" on the part of the Bank of Israel, and added that "Stanley Fischer is liable to repeat [former Bank of Israel Governor David] Klein's mistakes."
"It is clear that a lowering of the interest rate will be necessary at the end of the month. Only if Fischer is prepared to get used to the idea that negative interest rate gaps against the US (lower interest in Israel than the Fed rate), will it be possible to stop the shekel's strengthening trend and bring the inflation environment back to target rate," Leader said.
Leader predicted that the overall 2006 interest rate would come to a low 0.8% "in the best case," falling short of the Bank of Israel's price stability target of 1%-3%.
Inflation could end up even lower if housing prices turn out to be unexpectedly low, they said, and attributed inflation's "collapse" to the recent drop in fuel prices and the shekel rise.
"For an entire year already Fischer has been broadcasting dissatisfaction with the situation in which the interest rate in Israel is lower or equal to the Fed's interest rate in the US," bringing the shekel rate up by 2 percentage points over the past year, Leader economists said.
"The Bank of Israel ignored macro forces supporting the shekel's strengthening," primarily the large surplus in the current account and increased foreign investment in Israel, they said, adding that "it is not clear at all why the Bank of Israel raised the interest rate in the middle of the war in the North," when the shekel had strengthened to NIS 4.43 per dollar from NIS 4.52 at the war's outset.
"Without the last raise in the interest rate, perhaps the drop in the exchange rate [as the shekel rose against the dollar] would have been prevented," Leader said.
Harel Group Insurance and Finances analysts said the US Federal Reserve also could begin dropping its interest rate soon anyway, as figures showing slower economic growth and continued drops in the price of oil "reinforce our assessments that the US interest rate has reached its peak."
Domestically, weakening in the labor and housing markets, the dropping oil and fuel prices, and "especially" the shekel's strengthening against world currencies, would likely cause the Bank of Israel to lower the interest rate before the Fed, Harel said, warning that if the rate is not lowered, inflation could end up beneath the 1%-3% price stability target.
The shekel is likely to see a "moderate" drop against the dollar if the Bank of Israel lowers the interest rate or if the market expects the central bank to do so, Harel said.
In the short-term, Harel recommended investors in the capital market to prefer shekel investments over investments pegged to the consumer price index. The stock of companies that export consumer goods to the US market is getting riskier, since such companies are likely to suffer damages due to a slowdown in US consumer spending and the weakening dollar, the group said.
Investors with "significant exposure" to the US market and the dollar should reduce their exposure, by future sales of dollars assets alongside purchases in other foreign currencies, Harel analysts said.