The shekel continues to mark five-year highs against the dollar, even in the face of last week's interest rate cut by the Bank of Israel, amid ongoing weakness in the US currency. "Despite the 25 percentage point interest rate cut by the Bank of Israel creating a negative interest rate gap with the US, which was supposed to weaken the shekel, the opposite happened," said Yair Alek, CEO of Axioma Investment House. "The main reason for this trend was the fact that the dollar did not just drop against the shekel but more significantly against all major currencies, in particularly the euro, in reaction to US economic data pointing to a slowdown of growth over next few months." Alek added that as the US currency weakened worldwide over recent months, investors sought investments in higher yield markets including emerging markets such as Israel, which in turn was another factor strengthening the shekel. From the start of the year, the shekel has strengthened by about 8% against the dollar and 4% against the Bank of Israel's basket of currencies. It was trading at 4.23 late Monday, its highest level since December 2001. Last week, the US dollar, for a second consecutive week, fell to the lowest level against the euro since March 2005, and near a three-month low versus the yen after reports showed US jobless claims rose while Chicago-area business contracted for the first time since April 2003. The negative data, in turn supported speculation that the US Federal Reserve would cut interest rates at the beginning of 2007. The Fed left its benchmark rate at 5.25 percent the past three months, after two years of increases. "US economic data published last week signaled strong moderation of the inflation rate in the US, which in turn is bound to lead to an interest rate cut by the US Fed earlier than expected," said Gilad Cohen, macroanalyst at Gaon Investment House. Rafael Evron, head currency analyst at Bank Leumi added that the anticipation in the markets was that the US Fed would cut interest rates in the first quarter of 2007. This expectation supports the forecast by Union Bank economists, who believe that although the Bank of Israel gave no indication that a further interest rate cut was in the offing, Bank of Israel Governor Stanley Fischer will probably make a further cut of at least a quarter-point next month, in view of the dollar weakness worldwide. "We view the present exchange rate as too low to be economically warranted, while the political and security-related risks don't warrant a dollar that cheap either," said analysts at Gift Asset Management. "The appreciation of the shekel and near-zero or negative inflation expectations for the months to come will yet force the Bank of Israel to lower interest rates again." Bank Leumi noted that without any significant developments in the security and geo-political situations, the US dollar would continue to trade against the shekel around its present levels. In addition, the exchange rate would be influenced by trends in other international rates. "We see no recovery in the dollar market in the short-term and expect the negative trend to continue," said Alek. "Unless the dollar-shekel exchange rate moves above NIS 4.30, I wouldn't recommend touching the currency". Union Bank and Gaon Investment House expect the shekel-dollar exchange rate to trade between NIS 4.21-4.30/$ in the short-term. The shekel has support at NIS 4.238/$ while the closest resistance level is NIS 4.331/$. In light of the weak US currency, Cohen at Gaon Investment House, recommended diversification of investors' currency portfolio in such a way that the US dollar would make up no more than 30% of the whole portfolio.