Ugandan shilling hits 1 year low vs dollar on energy sector demand

KAMPALA: The Ugandan shilling weakened 1.1 percent to hit a one-year low against the dollar on Tuesday on swelling demand for hard currency from commercial banks and firms in the energy sector.

At 1004 GMT, commercial banks in Kampala quoted the currency of east Africa's third-largest economy at 2,675/2,685 to the dollar, from Monday's close of 2,670/2,680, and from 2,680/2,690 in earlier trade.

The currency touched 2,685/2,695, a level last hit on Nov. 2, 2011, according to Thomson Reuters data.

The shilling's depreciation has sharply accelerated in recent weeks, mainly fuelled by dollar demand from importers stocking goods for Christmas holiday shoppers. It has also taken a knock from a string of aid cuts this month after donors - a significant source of hard currency - alleged corruption.

"The market is shallow on dollars yet demand by banks is very strong so the shilling is taking in a lot of pressure," said Faisal Bukenya, head of market making by Barclays Bank.

Uganda's currency has now lost 7.6 percent of its value against the dollar in the year to date, according to Thomson Reuters data.

Its weakness is also due partly to the rapid unwinding of official interest rate hikes after an inflation surge cooled. Market analysts say this month's decision by BoU to slow down the pace of its policy easing might provide the shilling with a measure of support in the medium term.

The central bank cut its benchmark rate (CBR) by only 50 basis points to 12.5 percent, less than the anticipated 100 basis points.

"The energy sector is also exerting enormous demand on the dollar and the shilling is tumbling as a result," said Ahmed Kalule, trader at Bank of Africa.

"And the shilling is not helped by the fact that dollar inflows are really very scarce."

Ahmed said money market players were now eyeing 2,700 as the next psychological level for the shilling and that crossing it was likely to spook the market into panicked greenback purchases.

Technical analysis of the shilling's 14-day and 50-day weighted moving averages shows it is expected to keep weakening against the dollar in the short term.