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shillingNAIROBI: The Kenyan shilling firmed against the dollar on Wednesday, extending gains after the central bank (CBK) said it would sell hard currency directly to some key sectors in a fresh effort to bolster the hard-pressed local unit.

The shilling slumped to a record low of 104.15 on Tuesday before rallying to close at 102.9 on the back of the new central bank measures.

The central bank governor also clarified later that any action would be temporary and that he remained committed to a free-floating exchange rate.

"The market may have taken the comment (on selling hard currency) positively. We are likely to see the shilling a bit stronger this morning, but the market will wait to see exactly what the situation will be once it becomes effective," said Chris Rwengo, head of trading at Standard Chartered in Nairobi.

"Right now the market is operating on the sentiment that it is assumed the big demand in the market will fade away if CBK was to fill it, and therefore the pressure on the shilling will be significantly reduced," he said.

The shilling traded at 101.5 at the start of the session before slipping back to 102. At 0656 GMT, banks quoted it at 101.80/90 to the dollar, up from Tuesday's close of 102.70/90.

The shilling has been under fire for months due to a crisis of confidence in the central bank's ability to defend the currency, tackle inflation and close a widening balance of payments gap.

The bank's latest moves follow a series of policy efforts in money markets which first saw interest rates soar to more than 30 percent before coming back down into single figures.

Traders said another reason behind the strengthening shilling on Wednesday was increased oversight by the central bank on who was holding the US currency. The bank has blamed commercial banks for not supporting the shilling.

"People with long dollar positions are trying to square off because of the new reporting rules introduced by central bank. I doubt the shilling will go below 100," said a senior trader at one commercial bank.

"People don't want to buy dollars for holding because they can easily be accused of hoarding," he said.

Other traders said the shilling was expected to stay under pressure as the bank has yet to say how it would offer products to buyers and sellers of foreign exchange beyond spot trading, and for how long it would sustain the measures.

"When you talk about foreign exchange, there is a wide raft of products which importers buy, like forward contracts and such. Now you ask yourself if these guys are able to price that. In which case his statement needs to be clearly well thought out," said a senior trader at a second commercial bank.

"(The governor) is actually creating false hopes on the part of importers and it's going to create a sudden rush for foreign currencies once they realise that it's only targeted sectors are in his proposal," he said.

Copyright Reuters, 2011

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