THE Ugandan shilling was stable on Thursday but was vulnerable to selling pressure on jitters about the impact of continued fighting in South Sudan and a pick-up in corporate dollar demand after the holidays.
The shilling firmed 6.6 percent against the dollar in 2013 but has come under pressure since the central bank unexpectedly cut interest rates last month. Analysts expect it to ease policy further at a meeting on Friday.
Market players were also eyeing a Treasury bond auction.
Commercial banks quoted the shilling at 2,520/2,530 to the dollar, unchanged from Tuesday's close.
The market was closed on Wednesday for the New Year holiday.
"On the currency front, depreciation pressures are beginning to show up, largely driven by sentiment with respect to geopolitical issues," said Stephen Kaboyo at Alpha Capital Partners.
"This could be aggravated by corporate demand as markets return to normal business after the holiday season."
Fighting in South Sudan, which has pushed the country towards civil war, has largely cut off trade routes connecting the country to most of its neighbours, depriving Uganda one of its major export markets and a key source of hard currency.
South Sudanese President Salva Kiir declared a state of emergency in two states on Wednesday as his negotiators prepared for peace talks with rebels to end more than two weeks of violence.
Kaboyo said slowing inflation and signs of improving business and consumer confidence will probably push the central Bank of Uganda (BoU) "to ride the tide and reduce the policy rate as we enter the second half of the financial year."
The bank is due to announce its benchmark central bank rate (CBR) for this month on Friday.
At its last meeting in December the bank unexpectedly cut its benchmark lending rate by 50 basis points to 11.5 percent, saying economic growth remained below potential.
Faisal Bukenya, head of market making at Barclays Bank Uganda, said that while a tight monetary policy stance had helped underpin the shilling in 2013, the political situation in South Sudan could influence the currency's direction in 2014.
"South Sudan is an important source of dollars and I think if the political situation there remains volatile it's going to be key in influencing how the shilling performs this year," he said.
Peter Mboowa, a trader at KCB Uganda, said that while the shilling faced some downside risk, a Treasury auction on Wednesday of two and five-year bonds worth a combined 130 billion shillings ($51.53 million) would probably cushion the shilling if the sale attracted foreign investors.