The dollar fell again against the shekel yesterday, pushing the representative rate down another 0.8% to NIS 3.26 per dollar. This is an over 11-year low - the last time the greenback saw these levels was January 1997.
The euro also lost ground against the shekel, and the European currency's representative rate fell a steep 1.6% yesterday to NIS 5.07 per euro.
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The euro is at a 5-year low against the shekel, and is now at its lowest level since January 2003.
However, in the rest of the world, the dollar actually strengthened yesterday, rising 0.46% against the euro to $1.5 per euro. The dollar recovered somewhat after the head of the Dallas Federal Reserve Bank hinted that the Fed is likely to raise U.S. interest rates.
In addition, the dollar has risen in anticipation of the publication of first quarter GDP growth figures. Forecasts are that U.S. economic growth was higher than expected for the first three months of 2008.
In any case, the shekel has shown strength across the board, rising 18.9% against both the dollar and the British pound over the past year; 5.2% against the euro; and 5.7% against the yen.
"The factors that supported the strengthening shekel have moderated greatly recently," claim the economists at the Harel Insurance and Finance Group.
They forecast a 1.8% rise for the dollar in the next six months, which will return the greenback to the NIS 3.35 level.
Harel analysts say the shekel's rapid rise against the dollar - and other currencies - is due to the quick pace of economic growth here in Israel, relative to other developed economies. In addition, the continued high level of foreign investments in Israel despite the world credit crisis, combined with a reduction in Israeli investments overseas, have also contributed to the shekel's rise.
For now, the Harel economists say, these factors that boosted the shekel are moderating, and some have even changed direction. "Economic growth is expected to slow, and foreign investment in Israel will decrease, and Israelis' overseas investments will grow again. In addition, the daily intervention of the Bank of Israel to increase its foreign currency reserves will also help weaken the shekel," said Harel economists.
However, they are still very cautious about predicting the shekel's fall, saying it will be very slow.
"A deviation in inflation above the target will harm the credibility of the policies of the Bank of Israel, which in such a case will act by quickly raising interest rates, or by ending its intervention in the foreign currency market," explained the Harel analysts.
Regarding last week's rate increase - interest rates were hiked by 0.25%, from 3.25% to 3.5% - they said the central bank has prepared the ground for further increases if inflation, and expectations for inflation, do not fall.
They expect interest rates to reach 4.5% in another six months, a full 1% higher than today.
Harel forecasts May and June inflation of 0.6% and 0.4% respectively, and also a further rise in U.S. interest rates. Due to this, they recommend investing in CPI-linked Israeli government bonds.
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