KAMPALA: The Ugandan shilling strengthened on Friday on expectations that the central bank would support the currency by selling dollars directly into the market, leading commercial banks to cut their dollar positions.
At 1140 GMT commercial banks quoted the shilling at 2,742/2,752, stronger than Thursday's close of 2,750/2,760.
"There were expectations in the market that BoU (Bank of Uganda) might come in to try to arrest the pace of depreciation," said David Bagambe, trader at Diamond Trust Bank.
"Some banks started to cut (dollar) positions on those expectations which gave the shilling some strength."
The local currency hit a three year low on Thursday after coming under huge pressure this week from dollar buying by telecoms, manufacturing and energy firms.
Traders say much of the dollar demand is from foreign owned firms that are preparing to file their 2014 earnings, while fuel dealers are importing extra stock to meet the expected demand during year-end holidays when people are more likely to travel.
Fund manager Alpha Capital Partners (ACP) said the central bank was unlikely to sell dollars in the currency market, but was "expected to aggressively continue draining liquidity".
Traders say the shilling is undermined by a spike in liquidity in the interbank caused by government spending.
The BoU has sought to mop up excess liquidity on three separate days this week.
ACP said the shilling, which is down 8.1 percent against the greenback so far this year, could also draw relief from the sharp drop in international oil prices as this could ease demand for hard currency by importers.
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