Ugandan shilling down vs US Dollar, seen recovering 16-May-2012

The Ugandan shilling UGX=> weakened against the dollar on Wednesday as worries about Greece undermined riskier assets worldwide, but traders said an auction of high-yielding Treasury bills could draw foreign demand and support the currency.

At 1139 GMT commercial banks in Kampala quoted the currency of Africa's biggest coffee exporter at 2,490/2,500, down from Tuesday's close of 2,480/2,490.

Results of a Bank of Uganda Treasury bill auction on Wednesday showed yields on the 91-day and 182-day notes edged up, although the 364-day bill declined slightly.

The weighted average yield on the 91-day paper rose to 18.7 percent at Wednesday's sale from 18.0 at the previous auction.

"There was heavy dollar demand in the interbank market which pressured the shilling to slide," said Faisal Bukenya, head of market making at Barclays Bank.

"But conversions by offshore investors who participated in the auction might buoy it tomorrow."

BoU left its key lending rate unchanged at 21 percent for the second consecutive time this month from April and analysts say the decision was in part to keep Uganda's debt relatively attractive to offshore investors.

Without a vibrant export sector, east Africa's third largest economy needs a steady flow of offshore investors in its debt to earn enough hard currency and keep the shilling supported.

An unexpected rate cut and a slump in yields sent the local currency plunging to its 2012 record low of 2,620 in March.

"The shilling's slide is also mirroring global worries about the euro zone, especially the political woes in Greece," said Dickson Musoni, a trader at KCB Uganda.

Another trader at a leading commercial bank said fears of a deterioration in the euro zone's debt crisis were likely to undermine confidence in the shilling and limit any possible gains from the auction.

The shilling is up 0.6 percent against the dollar this year.

Reuters