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Shilling drops to dollar, but...

07 November 2011, 13:38

Nairobi - The Kenyan shilling stumbled against the dollar on Monday on the back of importers buying the U.S. currency, but traders said it was likely to firm due to a liquidity crunch in the market.

At 0645 GMT, commercial banks quoted the shilling at 97.30/80, weaker than Friday's close of 97.00/50.

"We got some importers calling to see if they can buy (dollars). But the market is tight on the shilling side and the money markets. That should give it support," said Ignatius Chicha, head of markets at Citi Kenya.

Central bank raised its key lending rate by 550 basis points to 16.5 percent last week to combat volatility in the exchange rate and high inflation, sending overnight rates to 25.9 percent, thus making funding of dollar positions costly.

"Ultimately, we do expect to see a slowdown in demand, and the shilling to recoup some losses in days ahead," said Dickson Magecha, a trader at Standard Chartered Bank.

The central bank also said last week that it would intensify scrutiny on banks that borrowed from its discount window two times in a week.

"You have to think twice before taking any positions. Plus the banks have increased their lending rates, so it will become more expensive to buy dollars," said Chicha.

Traders said some importers are betting on a stronger shilling, placing orders at 95 to the dollar, while they expected the shilling to trade in a band of 96.50-98.00 against the dollar this week.

- Reuters

Tags economy

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