Dollar down 1% to NIS 4.6730 Wednesday morning

The dollar is down 1% to NIS 4.6730 in early currency trading Wednesday. Yesterday's representative exchange rate was set at NIS 4.72, dropping from earlier peaks.

The weakening of the dollar was triggered by Bank of Israel Governor David Klein's Tuesday announcement that it is impossible to persist with short-term low interest rates when long-term interest rates do not decrease.

The dollar is currently trading at 2.2% or 10 agorot below the record high yesterday morning, before the governor made his announcement.

Dealers said that the public's foreign currency activity will affect dollar trade because the public didn't have time yesterday to respond to the governor's announcement. The dealers expect the dollar to further drop should there be strong selling by mutual funds specializing in foreign currency.

The dealers estimate that the weakness of the dollar could continue but expect more jittery trade.

Dr. Jacob Sheinin, director of consulting firm Economic Models, estimates that Klein's announcement is in itself insufficient to stabilize the exchange rate, and that Klein will eventually have to raise key lending rates by 2%. Sheinin said that a devaluation steeper than NIS 4.5 is ineffective because it will create inflationary pressure.

The currency market is awaiting the Friday publication of the January consumer price index. Economic entities anticipate a 0.8% climb, compared with estimates of a rise of 0.7% to 0.9%. A climb higher than this range could lead to weakening of the dollar against the shekel, due to the probability of increased lending rates.

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