The Israeli currency moved to 3.65 versus the dollar, its strongest level since May 22, two days before Prime Minister Benjamin Netanyahu said legal system changes were back on the agenda but that he sought a compromise with the opposition.

The plan announced in January triggered a political crisis and mass protests, drove away investment, cut growth prospects and weakened the shekel, which in turn kept inflation high and led to more Bank of Israel rate hikes.

Last Friday, the shekel reached a more than three-year low of 3.753 per dollar.

But next week, parliament is expected to vote on two lawmakers to join a committee that will select judges, including to the Supreme Court, one of the few checks and balances in Israel's political system.

Analysts believe a member of the opposition could be one of those appointed and a first sign of compromise talks bearing fruit and a setback for hardliners in Netanyahu's religious-nationalist government who want more control over judicial appointments.

Rafi Gozlan, chief economist at the IBI Investment House, said market concerns over the judicial plan may be mitigated with an opposition member on the panel "so that the depreciation of the last two weeks in the shekel has been almost completely erased."

Still, "the situation is very fragile, because the market's level of trust in the government is not high," he said.

So, Gozlan added, if this turns out to be a ruse and not "real steps in the direction of compromise and withdrawal from the original legislative intentions, then the risk premium will rise again rapidly, including a rapid depreciation of the shekel."

Despite a 3% appreciation of the shekel this week, the currency is still 6.5% weaker versus the dollar the past six months.

Last week, Bank of Israel Governor Amir Yaron said a further weakening of the shekel would likely lead to more rate increases.