In an attempt to reduce the upward pressure on the shekel, the authorities recently unveiled a series of measures designed to curb the influx of "hot money". A 10% reserve requirement has been placed on local banks' derivative transactions with non-residents. In addition, by introducing reporting requirements for non-resident transactions above a certain size in the local-currency and fixed-income markets, the central bank has paved the way for a lifting of the tax exemption that foreigners previously enjoyed when trading short-term government debt. In the wake of these measures, the currency has indeed weakened-although arguably, it has been the political unrest in the Middle East which has played a more decisive role in reducing the inflow of capital into Israel. Given the ongoing political convulsions in the region, this uncertainty is set to persist for much of this year, and possibly beyond. A widening merchandise trade deficit will also weigh against the shekel in 2011, despite the attractions provided by rising local interest rates. Looking further ahead, we expect the current-account surplus to expand sharply in the latter part of the forecast period, leading to a renewed appreciation of the shekel.