The shekel is rebounding from its Monday morning slump to NIS 4.776 per dollar.

The shekel began the day sinking against the dollar to NIS 4.79. But by noon the dollar's gains weakened, bringing its exchange rate to 0.15% above its representative rate of Friday, which was NIS 4.769.

Trade in shekel-dollar options on Sunday priced the dollar at NIS 4.74.

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 dollar's steep drop in options trade yesterday to NIS 4.74 was due to speculators adjusting their positions, not an overweening sense of restored faith in the shekel, dealers explain. The latest 2% rate hike to a nominal lending level of 9.1% forced speculators to rethink their long positions, which beefed up the shekel.

Developments on the bond market indicate that players believe the central bank has done raising the rates for now, and that interest will drop in September by 0.2% to 0.5%, assuming the markets stabilize. That would reduce the current interest rate gap between the shekel and dollar, which now stands at 7.35%, and is the key factor behind the shekel's restored strength, dealers say.