The shekel is weakening in options trade on the Tel Aviv Stock Exchange Sunday, despite Israel's withdrawal from the Palestinians headquarters in Ramallah, known as the Muqata.

The shekel began the session sagging mildly, picked up in morning options trade but started to weaken again in the afternoon. The dollar is now trading at NIS 4.87, 0.5% above its representative rate of Friday, which was NIS 4.847.

The dollar's current exchange rate is less than 0.1% above its Thursday official rate, when it peaked at NIS 4.91 as the Israeli army closed on Yasser Arafat's headquarters in Ramallah.

Foreign banks are responsible for much of the action, say sources at the Gift brokerage. But although they are spearheading the moves, they are not the only ones speculating on currency, the sources added.

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The turmoil between Israelis and Palestinians aside, other factors playing against the shekel include the Brazil crisis, which is creating a distaste for emerging markets. A second key element is the uncertainty surrounding the budget specifically, whether the government will manage to push the tight budget for 2003 through a balky parliament.

Several rating agencies have broadly hinted that failure to pass the budget will result in a sovereign credit downgrade for Israel. Even if the budget passes, however, Israel may find its rating cut, some analysts warn.

A technical analysis by Gift economists shows that the shekel's trend is to increase against the dollar, despite the high 9.1% interest rate on the Israeli currency. The psychological barrier of NIS 5 to the dollar could be broken, they add: When the race for foreign currency begins, it can be hard to stop.