​Summary:

During 2004, the NIS (New Israeli Sheqel) was stable against the currency basket, depreciating by a modest 0.8 percent. This was the result of moderate appreciation against the US dollar - 1.6 percent, coupled with depreciation of 6.2 percent against the euro. The NIS also depreciated in real terms against the currency basket due to a smaller rise in the consumer price index in Israel than in that of its main trading partners.
During the first five months of the year the NIS depreciated against the dollar, reaching NIS 4.634 in mid-May against the background of portfolio adjustments by domestic Israeli investors out of NIS and into foreign currency during January and February followed by net sales of NIS against foreign currency by foreign financial institutions during March, April and early May. 

From May and then on balance until the end of the year, the NIS strengthened against the dollar primarily due to the weakening trend of the US dollar on world markets. The NIS closed the year at 4.308 against the dollar. Other factors which supported the NIS against the dollar during the year include: the perceived improvement in the geo-political environment and relative calm in the security situation, an increase in foreign investment in Israel, rising global capital markets, the positive domestic economic environment which was supported by continued global growth, the 2004 budget deficit which came in below target, a balanced current account and the decline in global credit risk premiums.
An international comparison shows that the NIS appreciated against the dollar noticeably less than other currencies, of both advanced and emerging economies. Possible reasons for this include the low level of domestic interest rates and resultant narrow interest rate differential against the dollar, as well as the low volatility of the NIS/dollar exchange rate.
The NIS market was characterized by stability in 2004 both in comparison to previous years and in comparison with other emerging market currencies. This was reflected by a narrow NIS/dollar trading range, a decline in the volatility of the NIS/dollar exchange rate to 4.3 percent from 7.5 percent in 2003, and a narrowing of the interbank bid-offer spread to 0.45 agorot from 0.6 agorot in 2003.

The average daily turnover of foreign exchange in the NIS market totaled $1.65 billion in 2004, representing a marginal decline from the $1.68 billion registered in 2003. This was the first year since the establishment of bilateral NIS/dollar trading in which there was no growth in average daily turnover. Spot market turnover declined to an average of $722 million per day in 2004 after $748 million in 2003 and $827 million in 2002. This can be attributed almost exclusively to a decline in interbank spot activity. 
 
 
Chapter 2: Developments in Israel's Foreign Currency Markets in 2004 - PDF file