The shekel surged to its strongest level in nearly three months against the dollar on Monday, supported by the steep rate hike last week.

The shekel's representative rate was set at 4.7620, its strongest level since April 11, from Friday's 4.7690. After the setting of the official rate, the shekel gained further to 4.7599 to the dollar.

Dealers said this was the fifth straight session in which the shekel gained strength, but none cared to surmise how long the shekel's surge would last, due to the prevailing economic and security uncertainties.

Dealers are mixed in their predictions about the shekel-dollar direction. "The shekel may gain more strengthen in the short term, but in the long term it will weaken to NIS 4.8 to NIS 4.9," estimated one dealer, based on assessments of inevitable bad news on the government budget and deficit, hostilities with the Palestinians, and a looming downgrade for Israel's banks.

The Israeli currency had slipped to 4.79 at the start of trading Monday after Israeli forces killed a senior Hamas militant in the West Bank late on Sunday, arousing fears of repercussions.

"The shekel opened lower due to the political situation but after that we saw two waves of dollar selling in a continuation of last week's trend (due to the rate rise)," said a dealer at Mercantile-Discount Bank.

The Bank of Israel last Monday raised its key lending rate for July by 2% to 9.1% to curb inflation and to stabilize financial markets battered by worsening Israeli-Palestinian violence and uncertain fiscal policy. Two previous rate hikes by Bank of Israel Governor David Klein in late May and early June had failed to stop the shekel's slide. The central bank has boosted rates by 4.5% over the last month, bringing the differential with the U.S. federal funds rate - which stands at 1.75% - to 7.35%.

Dealers said the rate gap has given a bid to the shekel, which had plunged by more than 14% against the dollar since the beginning of the year, pressured by the 20-month

intifada

and widespread economic uncertainty.

"The rate rise has strengthened the shekel for now but there are still worries about economic policy which could see the shekel fall," the Mercantile-Discount dealer said, adding support for the dollar was at 4.75 shekels and resistance at 4.80.

On the crosses, the basket of foreign currencies was set at 4.9841 shekels compared with 4.9953 on Friday. The shekel was set at 3.9726 shekels per 100 yen compared with 4.0039, against the euro at 4.7184 shekels against 4.7339 and against the pound at 7.2966 versus 7.3056.