KAMPALA - The shilling held steady against the dollar on Monday, with traders expecting the local currency to be supported by foreign investors participating in this week's Treasury bond auction.

The central bank is due to sell 100 billion shillings ($37.38 million) worth of 3-year Treasury bonds on Thursday.

At 1125 GMT, commercial banks in Kampala quoted the currency of east Africa's biggest coffee exporter at 2,660/2,670, unchanged from Friday's close.

"There's generally weak demand for dollars in the market which has kept the shilling steady but I anticipate the auction to boost the (dollar) supply side," said Faisal Bukenya, head of market making at Barclays Bank.

"So I see the shilling keeping a stable position."

Some market players say the local currency will take a cue from this month's inflation data due to be released on Thursday.

After cooling for much of 2012, price pressures in east Africa's third-largest economy have started to bubble again with headline inflation rising for a second straight month to 5.5 percent in December from November's 4.9 percent.

Analysts are keen to see whether prices surge again in January, which could push the central bank to hold its key lending rate again and potentially support the shilling.

Bank of Uganda this month left the rate unchanged at 12 percent from December to check the surge in prices and relieve the pressure on the shilling, which ended 2012 eight percent down against the dollar.

"The shilling is expected to remain range bound this week as Bank of Uganda will again be in the market with a Treasury bond auction," said a market note from KCB Uganda.

KCB said the local currency would oscillate in the 2,650 and 2,680 range.