The Ugandan shilling edged up against the dollar on Friday as commercial banks pared down their greenback positions on the back of a lower-than-expected jump in dollar demand by local firms after a recent interest rate cut.

Market players also said the shilling was gaining from the dollar's weakening against the euro after the European Central Bank unveiled a bond-buying programme to lower borrowing costs for Spain and Italy.

At 0906 GMT commercial banks in Kampala quoted the currency of east Africa's third-largest economy at 2,505/2,515, stronger than Thursday's close of 2,510/2,520.

"Commercial banks had probably overbought dollars ahead of the policy rate decision anticipating a major jump in (dollar) demand," said Brenda Akumu, trader at KCB Uganda. Reuters

"But since the rate cut, it has become apparent the rise in demand wasn't going to be that much or come that fast so they're rolling back those positions and supporting the shilling."

Bank of Uganda (BoU) trimmed its benchmark Central Bank Rate (CBR) in September by 200 basis points to 15 percent from August' s 17 percent saying it needed to act aggressively to accelerate a recovery in credit flow and stimulate growth.

Although the shilling has weakened fractionally since the rate cut, analysts say the currency is still vulnerable to bigger losses in the medium term as policy easing works its way into the real economy.

"I think the shilling's gains are being underpinned by the dollar's weakening against the euro but they're likely to be brief," said Robert Mpuuga, trader at Housing Finance Bank.

"Next week we'll probably see these gains erode, especially if the yields at the bond auction fall."

BoU is to due to auction a total of 100 billion shillings ($39.76 million) worth of Treasury bonds next week and yields are expected to decline on the back of the bank's loose policy stance. Reuters