NAIROBI: The Kenyan shilling weakened on Monday after banks bought dollars to cover short positions, traders said.
At the close of trade, commercial banks quoted the shilling at 88.20/88.30 to the dollar, from 88.05/88.15 on Friday.
The shilling has been supported by tighter conditions on the interbank market, where the weighted average lending rate rose to 11.9492 percent on Friday from about 7.5 percent in mid-July.
Sheikh Mehran, head of trading at I&M Bank, said there was little dollar buying by companies and most of the trade was by banks.
"I have not sighted any corporate demand for dollars, they stayed away at these levels, but there are banks buying. This is short-covering most likely," Mehran said.
Some traders said the government has delayed the release of funds to departments and local authorities, causing a tightening of the money market.
Mercy Mbature, a trader at National Bank, said some of the buying could be position-taking by banks concerned the shilling could weaken further.
Commercial Bank of Africa trader Joshua Anene said the shilling looked vulnerable as the currency had been weakening over the past two weeks even though liquidity had tightened.
"That tells you that if money market conditions improve, and the rates come down, then the shilling should come under pressure," he said.
Anene added that the central bank may once again intervene if the shilling continues weakening.
Traders forecast the shilling was likely reach 88.30 once liquidity eased.
On the stock exchange, shares broke a two-day winning streak as the benchmark NSE-20 share index inched down 2.35 points to finish at 5,040.56 points, down from the 7-month high it closed at on Friday.
Shares in Kenya Airways fell 5 percent to 9.80 shillings, after the carrier said over the weekend it would suspend flights to West African countries hit by the Ebola outbreak.
In the debt market, bonds worth 4.8 billion shillings ($54.42 million) were traded, up from 2.8 billion shillings on Friday.
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