KAMPALA: The Ugandan shilling breached a key psychological level and weakened to a record low on Wednesday after a surge in demand for dollars from energy companies. At 0805 GMT commercial banks quoted the shilling at 3,510/3,520, weaker than Thursday's close of 3,475/3,485.
"The energy sector players have been out for some time but they're now coming in with demand," said Faisal Bukenya, head of market making at Barclays Bank.
However, Bukenya said, the shilling's depreciation has slowed a bit after a liquidity squeeze limited interbank appetite. "Funding dollar positions is now very costly so players in the interbank are holding back on demand," he said.
In recent days, market players had said they were eyeing 3,500 as a key support level.
The scarcity of shillings pushed rates on overnight funds to between 14-17 percent on Wednesday from 12-13 percent at the end of last week.
The shilling has weakened 21.3 percent against the dollar this year.
In recent weeks, it has come under more pressure, largely because of demand by commercial banks worried about the currency after the central bank signalled it was willing to let the shilling weaken until it finds its market value.
Early this year, Bank of Uganda sold dollars to support the shilling. But it has largely declined to intervene in recent weeks as the currency dropped through a series of record lows.
The country's widening current account deficit and ballooning public spending before next year's presidential elections have also undermined market confidence in the shilling.
In a market note, Stephen Kaboyo of Alpha Capital Partners, a fund manager, said players would "continue taking positions based on sentiment that BoU has surrendered as far as intervention is concerned."
"Whenever there is such market news, anxiety builds up," he said. "The market could easily be thrown into a tailspin going forward."
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