First, the facts. After two days of relatively calm trade in the Israeli currency market, yesterday afternoon the dollar started shooting up against the shekel, as it did last week. This morning the trend stepped up a gear. Dealers say it almost touched on NIS 4.30, then moderated slightly to trade at around NIS 4.29.

Levels like these are food for several thoughts.

• It's a two-year record for the dollar-shekel rate. If the dollar gains another 1%in strength, it'll reach an all-time high against the shekel. The previous record dates from the great devaluation of October 1998. Then, the Bank of Israel decided to kick up interest rates by a huge 2%.

When even that drastic move failed to halt the shekel's erosion, it did it again. Governor Jacob Frenkel raised rates by another 2%, altogether lifting the rates by 4% inside a month.

• The technical and psychological resistance levels at NIS 4.27 and NIS 4.28 are history.

• The huge spread banks are quoting between bid and ask rates indicates stress among market-makers. But the great surprise isn't how high the dollar has risen, it's who the buyers are.

Last week, the demand for dollars was generated by foreign banks. Today, dealers say, it's coming from the Israeli bank branches. Meaning, the public.

"The public" means private investors and households, who have shied away from the currency market for two, three years now, since October 1998. They didn't even hare for the safety of the greenback shelter when the intifada exploded.

So why has the dam broken?

Once conservative, twice shy
The main factor behind the public's sudden taste for dollars is apparently its disappointment from the performance of holdings in shekel-denominated mutuals.

After months of handsome profits, the public believed the mutual funds were a conservative investment that couldn't disappoint. Suddenly hundreds of thousands of households watched appalled as their investments began to lose money, in nominal terms.

Sparked by a crisis in long-term shekel-denominated bonds, mutuals lost money in July and August.

"A customer walks into the bank and asks the investment teller what's up with his fund. He hears it lost money. First of all, he goes into shock. Then he asks what's going up these days. He hears that dollar-denominated funds went up one or two percent in August," explained one forex dealer. The upshot is clear.

Boo! said the governor
Then there's Bank of Israel Governor David Klein. Last week he told the government what he thought about its intention to increase its deficit. His statements were certainly unnerving.

Klein warned that the government is already failing to meet its goals, and that expanding the deficit to 2.4% of GDP in 2002 would just make things worse. The inflated deficit would also increase the government's interest bill, he warned.

But his most alarmist statement was that the government's behavior opened the door to fiscal flabbiness and loss of investor faith, resulting in accelerated devaluation. "If it looks like the pattern of budgetary policy is spinning out of control," Klein ruled, "there is no doubt that the currency market will react differently."

The public has much more faith in Klein that in the government. When he speaks, the public listens, especially as his record in foreign-currency predictions is excellent: Earlier this year the governor said the dollar would strengthen against the shekel. It's now edging up to NIS 4.30.

Adding to the mutuals crisis and Klein, dealers say, are other factors: One is disappointment from Nasdaq, which seems to be eroding back to its April nadir. It doesn't look like Israeli companies will be waltzing back to Wall Street, and bringing home billions, any time soon.

Even after today, dealers don't believe the public will completely lose its cool and kindle a firestorm resulting in massive devaluation of the shekel, as happened in October 1998. But it could add impetus to the crawling devaluation.

Now the ball returns to the foreign banks, which took a break this week after last week's pounce on dollars. Will they take profit, or try to squeeze out a little more by pressing the pedal, trying to gauge the public's skittishness?

If the shekel continues to slide, the ball will roll onto Bank of Israel governor David Klein. Then the only question will be, at which dollar-shekel rate he breaks and boosts lending rates, as his predecessor did in October 1998.