The representative dollar exchange rate dropped to NIS 4.7010 on Wednesday, 0.45% down from the representative rate set Wednesday.

The dollar rose by about 0.5% at opening, to NIS 4.75, at which point sellers moved in, including foreign banks, and pushed the dollar down as low as NIS 4.69. This initial gain was attributed to the terror attack on an army roadblock in the territories on Tuesday, in which six soldiers were killed. Dealers said that big buying activity by banks and customers sent the dollar up in the morning. The buyers estimated that the dollar could climb higher given the escalation in regional violence. Spreads opened at 100 basis points, one agora, and such big spreads generate fluctuations, one dealer said. He noted the low volume of trade.

The currency market is awaiting the Bank of Israel governor David Klein's interest rate announcement Monday. The 1.1% rise in the January consumer price index led dealers to anticipate he will hike key lending rates at least 0.5%.

Other dealers believe Klein could postpone raising interest rates due to the pessimistic economic indicators published this Monday. In the fourth quarter unemployment rose to 10.2% from 9.6% in the third quarter, and gross domestic product shrunk by 7.2%.

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 support raising key lending rates. Klein has recently said that the bank is committed to the inflation target and that he won't hesitate to raise lending rates should there be a risk of high inflation.

Economic and financial services firm Prico Management anticipates that the dollar will continue rising beyond its all-time record. The estimates are based on inflation factors remaining in force. These include a low gap between shekel and dollar interest rates, deepening budget deficit, rising unemployment, and the crisis of faith in the approved budget. It appears government spending for 2002 will exceed the budget.

Prico economists estimate that Klein will raise interest rates gradually, and expect that the next rise will come to 0.3%. The economists said that should another rise be required, the governor will raise key lending rates by 0.4% next month.