August 29, 2014 / 1:56 PM / 3 years ago

Ugandan shilling strengthens as demand from banks recedes

KAMPALA, Aug 29 (Reuters) - The Ugandan shilling rebounded on Friday as a surge in demand for dollars from commercial banks slackened off.

At market close, banks quoted the shilling at 2,605/2,615, stronger than Thursday's close of 2,615/2,625.

"It's a self-correction because banks were buying possibly hoping for appetite from corporates," said Faisal Bukenya, head of market making at Barclays Bank. "They realised appetite from corporates might not recover fast so they have eased off."

The shilling is down 3.2 percent against the dollar in the year to date. Traders say it is likely to stay firm in the medium-term, partly due to improving ties between Uganda and donors. A row over an anti-gay law, now subsiding, had hurt relations.

Rising yields on Ugandan debt are also seen helping the local currency as they typically draw more offshore appetite.

Sage Daniel Muganza, trader at Centenary Bank, said the shilling would trade in the 2,600-2,630 range next week although expectations of policy easing in coming months could lead to pressure.

Uganda's annual headline inflation dropped to 2.8 percent in August from 4.3 percent in the year ended July, helped by a slide in the prices of food crops, the statistics office.

Analysts said that could open the way for the central bank to ease monetary policy when it next sets the key lending rate in October.

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Reporting by Elias Biryabarema; Editing by Alison Williams

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