Shilling slides to 25-year low as dollar demand intensifies

The Uganda shilling weakened sharply against the US dollar this week, touching a 25-year low of 3,870/3,880 on Friday morning as strong demand for hard currency from corporates, importers, interbank and offshore players outpaced available dollar inflows.

The shilling opened the week at 3,775/3,785, with dollar demand from importers and corporates initially matched by inflows from exporters and remittance companies.

However, the local currency came under increasing pressure from Tuesday as strong corporate and interbank demand pushed the rate to 3,785/3,795 before weakening further to an intraday low of 3,798/3,808 on Wednesday.

The pressure intensified towards the end of the week, with additional demand from offshore participants pushing the shilling to 3,870/3,880 on Friday morning.

According to Richard Nsubuga, Ag. Head of Trading, CIB Markets at Absa Bank Uganda, the shilling has depreciated by about 5.8 per cent since the beginning of the year.

“Looking ahead, the shilling is likely to remain under pressure if corporate, importer, interbank and offshore demand for hard currency persists,” Nsubuga said.

He, however, said stronger commodity export receipts and remittances could provide some support and help stabilise the currency.

“In the near term, the shilling is expected to trade wider within the 3,750–3,900 range against the dollar, with risks remaining tilted towards further depreciation,” he said.

Despite the pressure on the currency, the domestic money market remained liquid throughout the week, supported by maturities from the previous week.

Overnight funding rates declined progressively from 9.75 per cent on Monday to 8.75 per cent on Thursday, while the one-week rate averaged 9.90 per cent, reflecting increasingly comfortable funding conditions.

The Bank of Uganda remained active in the market through Open Market Operations and also held a Treasury bond auction during the week.

The new three-year and 20-year benchmark bonds cleared at 12 per cent and 15 per cent respectively, while the reopened 10-year bond also cleared at 15 per cent. The Central Bank accepted a total face value of Shs620 billion, against Shs990 billion offered across the three tenors.

Regional currencies

In the region, the Kenya shilling remained broadly stable against the US dollar, with the USD/KES exchange rate trading within a tight 129.40/50 range during the week.

Oil prices surge

Global oil prices recorded their strongest weekly gains since July, with West Texas Intermediate (WTI) rising 9.6 per cent and Brent crude gaining 10.3 per cent amid escalating tensions in the Middle East and growing concerns about disruptions to global supplies.

The rally was driven by intensified Houthi attacks, including strikes on Saudi energy infrastructure and reports of the seizure of Yemen’s strategic Red Sea port of Mocha, alongside continued disruption to oil flows through the Strait of Hormuz.

Strong Chinese crude purchases also strengthened physical markets and supported the bullish sentiment.

Brent recorded its biggest move on Thursday, surging 6.3 per cent to $107.63 a barrel, its highest settlement since May, while WTI climbed above $102 a barrel.

Although prices eased slightly on Friday as investors awaited US inflation data and assessed the possible impact on Federal Reserve policy, both benchmarks remained near multi-month highs. Analysts have increasingly turned bullish, with some forecasting that Brent could test $110-$120 a barrel if disruptions in the Persian Gulf persist.

The widening gap between Brent and WTI also highlighted Brent’s greater sensitivity to Middle East supply risks as markets remained focused on the possibility of further escalation.

Gold retreats

Gold prices fell 1.5 per cent during the week, declining from $4,404.30 an ounce on Monday to $4,337.93 on Friday.

The precious metal is now on track for its third consecutive weekly decline, with expectations of near-term Federal Reserve rate increases weighing on prices despite renewed safe-haven demand linked to escalating Middle East tensions.

Gold recorded its weakest session on Thursday, falling 1.8 per cent after hotter-than-expected US producer inflation strengthened the dollar and pushed Treasury yields higher.

The metal recovered modestly on Friday as investors awaited US consumer inflation data for further clues on the Federal Reserve’s next policy decision. However, geopolitical risks, a generally softer dollar and continued central-bank purchases were not enough to offset concerns over higher interest rates and oil-driven inflation.

Dollar weighs on euro, sterling

The euro and sterling both ended the week marginally weaker against the dollar, with EUR/USD falling 0.03 per cent to 1.1610 and GBP/USD declining 0.05 per cent to 1.3512.

The modest weekly changes, however, masked significant intraday movements as markets reacted to shifting expectations over US monetary policy and the strength of the dollar.

The dollar weakened through the middle of the week, with the Bloomberg Dollar Spot Index falling to its lowest level since February.

The move was driven partly by a surge in the yen, US Treasury buyback operations that disappointed investors expecting a larger increase, and comments by Treasury Secretary Bessent challenging traders over his resolve to support the yen.

The euro and sterling reached weekly highs on Tuesday and Wednesday, with EUR/USD touching 1.1633 and GBP/USD reaching 1.3547.

The dollar then staged a sharp reversal on Thursday after US Producer Price Index data showed inflation rising in August at its fastest pace in three months, driven largely by higher energy prices.

The data revived expectations of higher US interest rates ahead of the release of US consumer inflation data and the Federal Reserve’s September 16 policy meeting.

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