The shekel on Thursday bounced back from the previous session's record low against the dollar as the market continues to closely follow security developments, dealers said.
The Bank of Israel set the representative, or official daily rate, at NIS 4.9670 per dollar, compared with a record low of 4.9780 on Wednesday when a Palestinian militant blew up a car bomb next to a bus in Israel, killing 17 people.
Israel's army launched a six-hour raid on Palestinian chairman Yasser Arafat's headquarters on Thursday in reprisal for the bombing. "We haven't seen a big operation in response to the bombing - Israel went in a little bit and then got out," said Bank Hapoalim senior dealer Daniel Hass.
A series of bombings in March provoked a much more severe response from Israel, which then launched a six-week offensive in the Palestinian-controlled West Bank to root out militants.
Final approval from parliament overnight for the government's NIS 13 billion shekel emergency economic package also helped calm the forex market. The package is aimed at reining in a budget deficit swollen by falling tax revenues and higher defense costs.
Since the start of the year the shekel has lost 14% against the dollar as Israel's worst recession in nearly 50 years and worsening Israeli-Palestinian fighting spur demand for dollars.
Hass said the shekel remains bound in a range of 4.94-4.98 after briefly touching 4.995 in intraday trading last week. "I think the dollar will go higher and the market will try for 5.0 one more time but I don't think it will break it," Hass said.
The basket of foreign currencies was set at 5.1064 shekels compared with 5.1165 on Wednesday.
The shekel was set at 3.9803 shekels per 100 yen compared with 4.0005, against the euro at 4.6662 shekels against 4.6679 and against the pound at 7.2406 versus 7.2597.
After the setting of the representative rate, the shekel was trading at 4.9630.
Bank Hapoalim dealer Neil Corney estimates that the dollar will nose back toward NIS 5 in the days to come. There are plenty of elements bolstering the dollar, he says: escalating fighting between Israelis and Palestinians, climbing unemployment, and the anticipated enactment of the new Bank of Israel law that will weaken the central bank's autonomy.
There are also fears that Israel's sovereign credit rating will be downgraded, Corney added.
Another influence is the Rabinovitch tax reform committee, which is due to publish its recommendations next week. Any proposal to impose tax on shekel-denominated investment vehicles would make the shekel even less attractive, Corney pointed out.