The shekel could weaken by as much as 8% during 2002, lifting the dollar rate to NIS 4.60, says Citibank Israel's senior currency dealer, Tal Vardi.

He offers a second scenario, of a milder devaluation of the shekel to an average exchange rate of NIS 4.40 next year. But the risk elements are increasing, which supports the first theory of a more extreme steeper devaluation of the shekel.

Vardi predicts that the shekel-dollar rate will remain stable until year-end, fluctuating within a narrow band of NIS 4.20 to NIS 4.25. The shekel is more likely to retain strength, leaving it at the lower edge of the band, he says: At a rate of NIS 4.25 the incentive to sell dollars is strong.

The market is replete with dollars, he points out, which explains why it isn't bulking up against the shekel despite the terror attacks. Much activity on the currency market consists of speculators reacting to specific events, not implementing long-term strategy.

This Wednesday morning Vardi is being proved right: The shekel is edging up against the dollar to a rate of NIS 4.2450.

As for next year, events that could support a substantial weakening of the shekel include further deterioration of Israel's relations with its neighbors, growing inability of the Palestinian Authority to sustain itself because of sanctions by Israel, and escalation in fighting.

Uncertainty and conflicts surrounding Israel's economic policy could also contribute to weakening the shekel, Vardi says.

"If the Bank of Israel and Finance Ministry keep hunkering down in their positions, with (central bank governor David) Klein refusing to lower interest rates and the (treasury not) amending the budget soon, the effects will be felt in the currency market," he warns.

Uncertainty touches on whether and where the budget will be cut. The where is no less important, as the cuts could lead to political crises.

He also notes that since the treasury already admitted the government won't be keeping within its 2.4% of GDP deficit target in 2002, it should set a new target of around 4%.

Though he understands why Klein has been imposing a restrictive monetary regime, given the heavy price the marketplace paid when inflation was high, he still supports faster rate cuts, Vardi said.