With Ilan Mosnaim

The shekel spent Thursday gaining ground against the dollar after a series of economic moves by the central bank and government, culminating in a 4.5% hike in central bank lending rates to 9.1%.

As belief grows that the government is serious about cutting the budget, and seduced by the 7.3% gap between shekel and dollar interest rates, people have started to withdraw money from dollar-indexed mutuals and are putting it back into shekel-denominated vehicles.

The shekel has strengthened to NIS 4.8243 against the dollar, which has weakened 1.18% from its representative rate of Wednesday. From the beginning of the week, the dollar has lost 3.2% against the shekel.

The interest spread alone cannot shore up the shekel for long, though: pundits submit that another factor is faith in government spending cuts.

Today alone the public has withdrawn NIS 300 million from dollar-linked mutuals, estimate industry sources, after redeeming NIS 100 million yesterday.

Last week and early this week, the mutuals industry had been slammed by massive redemptions from shekel-denominated mutuals as the public demonstrated its lack of faith in Israel's economic leadership. About two billion shekels were withdrawn from shekel-based mutuals, estimate industry sources.

Yesterday massive selling of dollars by London banks lifted the shekel to NIS 4.873, from its representative rate of Wednesday, NIS 4.882. Tuesday's representative rate was NIS 4.919. Dealers say the mood in the currency market is turbulent in the wake of the WorldCom accounting scandal, and that speculators want to reduce their exposure while the dollar fluctuates.

Discovery of WorldCom's $3.8 billion fraud had sent the dollar tumbling in global markets against the yen and euro yesterday, creating a convenient backdrop for the comeback of the shekel.