JERUSALEM, Feb 19 (Reuters) - Israel's shekel ILS= advanced 0.3 percent against the dollar in light activity on Tuesday on the heels of the U.S. currency moving to a two-week low versus the euro.

The shekel’s official rate was set at 3.5910 per dollar, compared with 3.6020 on Monday. It was at 3.6010 in trading after the official rate was set and stuck to a narrow range of 3.58-3.60 during the session.

The shekel had reached a rate of 3.5780 set on Feb. 4, its strongest level since April 1998.

Tel Aviv shares rose 0.8 percent while 10-year bond prices ILSAHR2683=TA dipped 0.1 percent.

The shekel is one of the best performing currencies so far in 2008 with a gain of 7 percent against the dollar. The shekel appreciated by 10 percent in 2007.

The euro rose 0.5 percent to $1.4750 to a two-week peak.

At the same time, the local market was continuing to digest two key inflation reports that appeared to suggest steady monetary policy for the time being.

The consumer price index, issued last Friday, was unchanged in January from December and was up 3.5 percent over the prior 12 months. Economists polled by Reuters had predicted a 0.1 percent month-on-month increase.

On Sunday, the Bank of Israel reported that inflation expectations for the next 12 months increased to 2.6 percent in January from 2.1 percent in December.

Bank of Israel Governor Stanley Fischer has said he would not lower short-term interest rates while inflation pressures persisted.

He has come under pressure from business leaders and some politicians to cut rates to weaken the shekel since the strong Israeli currency was hurting exports.

The shekel has been underpinned by a widening of the Israeli-U.S. rate differential, which is now 1.25 percentage points after the Federal Reserve slashed rates to 3 percent with more U.S. cuts expected.

On the crosses, the shekel traded at 3.3397 per 100 yen compared with 3.3293 on Monday, against the euro at 5.2926 from 5.2731 shekels and against the pound at 7.0055 from 7.0253.

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