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Uganda Shilling Slides against US Dollar 15-May-2012

The Ugandan shilling weakened as much as 1.1 percent against the dollar on Tuesday, pressured by dollar demand from the energy sector, but traders forecast the local currency would rebound on potential dollar inflows after a Treasury auction.

At 1043 GMT commercial banks quoted the currency of east Africa's third-largest economy at 2,480/2,490, weaker than Monday's close of 2,460/2,470.

"We're seeing an uptick in demand from energy companies while supplies are fairly tight," said Ahmed Kalule, a trader at Bank of Africa.

"That mismatch has put the shilling on a weaker footing but we expect a recovery after tomorrow's auction."

Bank of Uganda (BoU) is due to sell Treasury notes of all maturities on Wednesday worth 120 billion shillings ($48.64 million).

Traders expect a healthy offshore investor participation, spurred by relatively high yields.

BoU held its key lending rate at 21 percent this month for a second time, even though inflation slowed down in April.

Analysts say the move was in part motivated by a desire to keep Uganda's debt yields relatively high to woo foreign investors whose dollars are a key prop for the shilling.

At the last auction on May 2 the 91-day paper returned a weighted average yield of 18.0 percent, down from 18.1 percent at the previous auction.

The local currency which is down 0.6 percent against the dollar this year, plummeted to its 2012 low of 2,620 on March 6 after a surprise rate cut and a slump in yields.

"The market's sights are now on the auction," said Denis Mashanyu, a trader at Standard Chartered Bank in Nairobi.

"And if significant inflows come in we might see a recovery but the overall outlook for the shilling is stable."


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