The shilling has got off to a jittery start in 2013, under pressure from falling interest rates in the second half of last year and the suspension of foreign aid.

Uganda's central bank left its key lending rate unchanged at 12 percent on Thursday, its first pause in a sustained easing cycle that began in June, but said further cuts were likely in the months ahead.

"We're seeing significant appetite for dollars returning to the market. Some oil and manufacturing names are showing up but the biggest underlying demand is from commercial banks because they anticipate a big surge in demand when business fully resumes next week," said Thaib Lubega at Stanbic Bank Uganda.

"This expectation is pressuring the shilling and looking ahead market sentiment still favours further weakening."

In early trading the shilling lost 0.4 percent to strike 2,712/2,722, a level last seen on Oct. 26, 2011. At 1048 GMT commercial banks quoted the shilling at 2,710/2,720, leaving it down 1 percent against the greenback so far this year.

Technical analysis of the shilling's 14-day and 50-day weighted moving averages suggest it could keep weakening against the dollar in the near term. The shilling ended 2012 down nearly 8 percent against the dollar.

Stephen Kaboyo, managing director of Alpha Capital Partners in Kampala, said Kenya's March presidential election, the first since a disputed poll in 2007 unleashed a wave of nationwide bloodletting, was beginning to weigh on Uganda's forex market.

"The shilling will continue to weaken on account of elevated import demand, players building long dollar positions as the anticipated Kenya elections events begin to influence short term market decisions," Kaboyo said.

Kenya's 2007/08 post-election violence sent the region's biggest economy into a tailspin and crippled major trade routes into landlocked neighbours including Uganda, Rwanda and south Sudan.

Foreign diplomats and local political analysts say fighting this time around cannot be ruled out.

Center>Copyright Reuters, 2013