By Elias Biryabarema KAMPALA (Reuters) - Manufacturing and oil sector dollar demand weakened the Ugandan shilling on Friday but traders forecast the local currency would firm early next week ahead of Wednesday's Treasury bond auction. At 0850 GMT commercial banks in Kampala quoted the shilling at 2,640/2,650 against the dollar, weaker than Thursday's close of 2,615/2,625. "The (shilling) slide was mainly driven by (dollar) demand from the manufacturing sector and some importers also came in," said Dickson Musoni, Treasury manager at KCB Uganda. "Importers have not been in the market for some time but shopping for the Christmas holiday season is setting in and importers are preparing for that, which explains their dollar demand," he said. Oil sector dollar demand amid tight supplies, risk aversion for east Africa's frontier markets and speculation have driven the shilling down as much as 19.4 percent this year. The local currency has, however, eased comfortably off its September 23 all-time low of 2,901, supported by an aggressive cycle of monetary tightening, the magnitude of which has surprised the markets. The central Bank of Uganda (BoU) has hiked its benchmark lending rate by 700 basis points since October 4 and by 10 percentage points since introducing the rate in July. Barclays Bank Uganda said in a market report that the outlook favoured a stronger shilling in the short term with dollar inflows seen rising. "The market has continued to see an increase in (dollar) inflows as NGOs receive funds to close out their end of year budgets," Barclays said in its daily briefing. "We have also seen offshore interest to sell dollars to participate in government securities auctions," the bank said. BoU is scheduled to auction a two-year, fixed-rate 95 billion shillings Treasury bond on Wednesday and the paper's yield is expected to rise in line with the bank's raising of interest rates.

Source