The dollar is soaring to NIS 4.72, 0.9% up from Monday's representative exchange rate, NIS 4.6780. The current rate is still 1.2% below the dollar's recent record high, NIS 4.78.

Dealers said that big buying activity by banks sent the dollar up to NIS 4.73, at which point the rise was somewhat moderated. The dealers related the strong demand to negative macro data published on Monday. The Central Bureau of Statistics reported that unemployment in the fourth quarter worsened to 10.2%, up from 9.6% in the third quarter, and gross domestic product shrunk by 7.2%.

Dealers are anticipating that lending rates will rise by at least 0.5% based on comments by Bank of Israel Governor David Klein last Tuesday. Klein said it is impossible to persist with short-term low interest rates when long-term interest rates do not decrease. The governor cautioned the public against dollar investments.

But some dealers believe it is unlikely that Klein will sharply raise lending rates given new economic data. One dealer said that raising interest rates in such times would only further depress the market.

Yet Klein has repeatedly said that price stability is the bank's only target. Thus, the strengthening of the dollar could roll over to prices which could lead to a hike in interest rates in order to restore calm. One dealer said it is now clear that talk cannot calm the currency market.

According to Bank of Israel data published some days ago, capital market inflation expectations are at a high 2.9%, near the upper limit of the 2002 inflation target of 2% to 3%. Other data show a marked 5.2% rise in payment means. Such data supports raising key lending rates.