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ugandanKAMPALA: The Bank of Uganda stepped into the foreign exchange market on Friday selling hard currency after the shilling slipped to its lowest level since Jan. 10 on the back of demand for dollars from the oil sector.

The shilling fell as low as 2,463 to the dollar , a level it last neared on Jan. 10 when it touched 2,465, from 2,385 on Thursday. The local currency climbed back to 2,450 after the central bank stepped in briefly.

"We have a lot of demand from the oil sector and the interbank market which is putting the shilling under great pressure," said Faisal Bukenya, head of market making at Barclays Bank.

Analysts say surging demand from the oil and manufacturing sectors against diminishing inflows from offshore investors was likely to sap the shilling over the next few weeks.

The currency, like others in east Africa, has been recovering from a dive to all-time lows of 2,901 hit in September helped by aggressive tightening by the central bank that pushed its benchmark rate as high as 23 percent.

"It looks we're now effectively past that sluggish business spell that follows the festive period ... commercial activity is now back on full speed," said a trader at a commercial bank.

"That explains the dollar demand we're having from some of the key sectors and I see the shilling remaining under pressure going forward," he said.

Some traders said foreign investors, who were credited with underpinning the shilling's recovery late last year, have begun to ease up on buying of Uganda's debt now that the central bank has begun to ease monetary policy again.

The weighted average yield on Uganda's three-year paper fell to 15.95 percent at auction this week, while the five-year bond also fell to 15.99 percent from 21.09 and 17.96 percent respectively at their last sales.

The Bank of Uganda cut its key lending rate to 21 percent this week from 22 percent, saying inflation was set to slow quickly this year.

The headline rate of price growth - whose surge last year on the back of food and fuel prices was at the heart of the currency's collapse - only edged down to 25.4 percent in February from 25.7 percent in January.

Copyright Reuters, 2012

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