Low Dollar Demand Relieves Shilling

After breaking through the psychological barrier of Shs 3,000, the Uganda shilling made some gain against the dollar, which saw it close the week in the 2,950 range.

It was the second time this year that the shilling had burst through the Shs 3,000 mark. At the close of trading on Holy Thursday, Bank of Uganda quoted the local currency at Shs 2,9993,009.

But as business opened on Tuesday last week, the demand for the dollar slackened.

“The Uganda shilling appreciated in the week’s trading from 3,00010 to 2,95565 levels before closing the week at 2,97080,” said James Mutuku, the head of financial markets at Standard Chartered bank.

“The appreciation was driven largely by subdued corporate demand and g inflows from development organizations.”

The weak shilling has been crucial at pushing up the prices of imported goods. Core inflation, which measures the changes in prices of goods and services less food and utilities, rose to 3.7 per cent for the year ending March 2015 compared to 3.3 per cent registered a month before.

Last week, BOU Governor Emmanuel Tumusiime-Mutebile projected that it could reach five per cent in June this year and move above the central bank’s target by next year. Mutebile increased the Central Bank Rate (CBR), which influences interest rates in the market, to 12 per cent from 11 per cent in order to stem inflationary pressures.

The central bank’s key policy rate is expected to limit borrowing and spending. The increase in the CBR usually leads to an increase in the yield on government securities, thereby attracting more offshore investors into the market.

The shilling has so far depreciated by seven per cent this year alone, according to Bank of Uganda. The cost of stabilising it has not been easy.

BOU executive director for Research Dr Adam Mugume said they have intervened with $207m this year alone on the sale side to help the shilling gain some strength. Stanchart projects the currency to trade within a range of Shs 2,940 and 3,040 this week.

Source : The Observer

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