Ugandan shilling falls as banks, energy firms seek dollars

THE Ugandan shilling slipped against the dollar on Wednesday, breaching a key support level, as commercial banks and energy companies sought dollars aggressively to meet end-year obligations.

A decline in dollar selling by commodity exporters also helped push the shilling firmly beyond the key 2,600 level with commercial banks quoting the currency of east Africa's third largest economy at 2,605/2,615 by 1244 GMT, weaker than Tuesday's close of 2,595/2,605.

The shilling has been under escalating pressure this week, fuelled by strong greenback demand from energy firms and offshore investors closing their local currency positions ahead of year-end.

"There's a marked decline in (dollar) inflows from commodities like coffee and fish because export volumes have been declining," said David Bagambe, trader at Diamond Trust Bank.

"And now that we have firmly broken the key level of 2,600, the shilling is likely to drop at a much faster pace."

Uganda's coffee exports last month fell by 17 percent from a year earlier, as heavy rains disrupted the beans' transportation from growing areas to processing centres.

Uganda is Africa's largest coffee exporter and earnings from crop are a key source of hard currency that helps prop the shilling.

The Ugandan currency has lost nearly five percent against the greenback in the year to date, partly undermined by the central bank's policy loosening run although the pace of that easing has now been slowed down.

Bank of Uganda (BoU) this month cut 50 basis points off its key lending rate to 12.5 percent after a run of much bigger cuts.

"The market is very short on dollars while on the other hand demand in the interbank market and from oil companies is still very strong," said Faisal Bukenya, head of market making at Barclays Bank.

Analysts say the shilling is likely to remain relatively weak for the rest of the year, undermined by Christmas-related import demand, but could rebound in the medium term.

Reuters