KAMPALA (Reuters) - Heavy interbank dollar demand sent the Ugandan shilling lower for a third straight session but traders said corporate tax payments should give some support to the local currency. At 0825 GMT, commercial banks in Kampala quoted the currency of east Africa's third largest economy at 2,318/2,328, weaker than Tuesday's close of 2,313/2,323. "It's demand in the interbank (market) undermining the shilling...actually it's mainly one bank buying, maybe they have a specific need (for dollars)," said Faisal Bukenya, head of market making at Barclays Bank. "Otherwise with corporates paying mid-month taxes, (dollar) demand remains depressed. We'll probably trade the shilling in 2,315-2,335 range today." The shilling has climbed 6.8 percent against the U.S. currency since January 1 and is firmly off a record low of 2,901 hit last September thanks to an aggressive round of policy tightening in the second half of 2011. The Bank of Uganda trimmed its key rate by 100 basis points to 22 percent in February and analysts expect the rate to fall further in the months ahead. This is likely to push yields on government debt lower, perhaps softening the heavy demand for Ugandan securities that has helped drive the shilling stronger so far this year. At an auction on February 8, yields on all Treasury bill maturities fell, with the 91-day paper dropping to 19.9 percent from 23.4 percent at the previous auction. "Waning dollar inflows and increasing interbank demand signal a potentially weaker local currency in the days ahead," said a market brief from Standard Chartered Bank.

Source