By Elias Biryabarema KAMPALA (Reuters) - The Uganda shilling recouped early losses against the dollar on Wednesday, a day after the central bank raised its key lending rate by 300 basis points to support the shilling and tackle a rate of inflation sitting at an 18-year high. The local currency fell in early trading to an intraday traded low 2686.8, Thomson Reuters data showed, before bouncing back to trade at 2,605/2,605 at 1137 GMT, having touched 2,595.05 earlier. Market players forecast Wednesday's Treasury bill auction would boost the shilling further. The local currency had hit a near four-month traded high of 2535.5 on Tuesday after the central Bank of Uganda raised its benchmark rate to 23 percent, before easing off. "Yesterday the market turned (shilling weakened) and that trend was continued in the morning. Some banks had taken short positions on the dollar but I guess they now realised they needed to firm them up after going low on dollar reserves. So the shilling took a hit but it self-corrected," said Dickson Musoni, Treasury manager at KCB Uganda. Faisal Bukenya, head of market making at Barclays Bank Uganda, said the shilling then rebounded back after dollar inflows entered the market. "We expect further appreciation after the auction results have come in because offshore investors convert dollars after confirming their bids have been accepted," Bukenya said. Yields for the 91-, 182-, and the 364-day papers are expected to rise at the auction -- worth 95 billion shillings -- in line with Bank of Uganda (BoU)'s tightening monetary policy stance. Year-on-year headline inflation in the east African country rose to 30.5 percent in October from September's 28.3 percent, fueled by a surge of non-food prices. Month-on-month inflation, however, decelerated significantly, an indication the BoU's cycle of tightening was working, according to analysts. "It's a very volatile market at the moment but we expect the recent trend of shilling appreciation to hold on average especially with support from today's Treasury bill auction," said a trader at a leading commercial bank. The central bank said yesterday it's tight policy stance had helped pull the shilling back from Sep. 23's all-time traded low of 2,901 by attracting offshore funds into its debt market. Yields on BoU's bonds and Treasury bills have been rising strongly on the back of the CBR's upward movement since the rate was introduced in July.

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