Even after the dramatic interest rate cut by the Bank of Israel for January, which had the immediate impact of weakening the shekel, analysts and economists predict the currency still will maintain moderate strength in 2007.
"Even after the bigger rate cut, looking ahead to 2007, we believe that in the short-term there is still room for the shekel to strengthen to a rate of NIS 4.10 against the dollar because of the weakness of the US currency around the world," said Eytan Admoni, head of foreign exchange at the Bank of Jerusalem. "For the next 12 months, our expectation is that the dollar-shekel exchange rate will be moving between NIS 4 and NIS 4.5."
Economists point out that the continued strengthening of the shekel reflects the ongoing weakening of the dollar worldwide and the anticipation of a slowdown in the US economy, as well as several positive macroeconomic developments in the local economy - in particular the increase in the current account surplus in the balance of payments and the vast inflow of foreign investment into the economy.
"The dollar inflow to Israel totaled more than $20 billion in 2006 and we expect this flow to continue in 2007," said Admoni. "The shekel's appreciation in recent months was to a large extent driven by foreign investment on the local market."
Analysts, on average, predict that the dollar-shekel exchange rate will be between NIS 4.25 and NIS 4.32 over the next six months, which is just about 2.5% above its current level and 3.5% above its level before the interest rate cut announcement.
On the dollar outlook for the next 12 months, investment house estimates differed over how far the shekel would depreciate.
Yair Alek, CEO of Axioma Investment House and Excellence Nessuah, expects the dollar-shekel exchange rate to trade around NIS 4.5 over the next 12 months, while others such as Nir Yafe, manager of Finotec Israel, expect the shekel to maintain its moderate strength and traded between NIS 4.25 and NIS 4.35.