At 0822 GMT commercial banks quoted the currency at 2,670/2,680, unchanged from Monday's close.

"It's a very quiet market with (dollar) demand from corporates largely absent," said Faisal Bukenya, head of market making at Barclays Bank.

"But there are some inflows from non-governmental organisations which combined with lack of (dollar) demand are helping the shilling to hold on to its strong position."

The shilling has risen 1.5 percent against the dollar since hitting a 14-month low on January 4.

But analysts say the currency, which fell nearly 8 percent last year, is vulnerable to losses in the medium term, undercut by a weak economic outlook, fears of political instability in Kenya, and aid cuts by western donors.

East Africa's largest economy, Kenya, is holding elections in March and there are fears of a reprise of the post-election bloodletting that accompanied its 2007 polls, which affected transportation of key imports such as fuel and food from the Kenyan port of Mombasa to landlocked Uganda.

Last month ratings agency Standard and Poor's downgraded Uganda's outlook to negative from stable, citing strained relations with donors.

On Monday, however, the International Monetary Fund (IMF) said Uganda's medium-term growth will reach its potential level of 6 percent to 7 percent.

"I believe the shilling has just about reached the end of its recent rally and from here depreciation pressure should resume as demand from importers comes back," said a trader at a leading commercial bank.