Kenyan shilling extends 7-day fall to new record low

NAIROBI, Tuesday

The Kenyan shilling weakened further to a new record low of 94.75 against the dollar on Tuesday, weighed down by importers' demand for the greenback, global selling of riskier assets and the central bank's injection of shillings.

Central Bank of Kenya (CBK) used reverse repos for a second day after injecting 15 billion shillings into the market on Monday. Traders said the operations were fuelling the shilling's weakness.

The bank started injecting funds into the money markets through reverse repos last month to see off a liquidity crunch that threatened to worsen as corporate tax payments fell due.

The shilling had fallen through resistance at 94.00, weighed down by energy and food importers' demand for dollars, and on the back of a continuing global sell off of emerging and frontier assets perceived as risky.

The shilling has lost 17.5 percent against the dollar this year -- down 4.3 percent since July 29.

The worldwide sell-off comes as investors lose confidence that the United States and Europe can rein in their debt burdens quickly and avert another recession.

At 1000 GMT, commercial banks quoted the shilling at 94.90 against the dollar, weaker than Monday's close at 93.40/60.

The shilling had depreciated 1.28 percent in intra-day trade, the biggest intraday fall since June 16 when it fell 1.98 percent, according to Thomson Reuters data.

Analysts have expressed doubts that the central bank is taking adequate measures in its monetary policy direction, with some saying it needs to tighten after inflation rose to 15.53 percent in July.

"CBK has lost market confidence and to make matters worse there's global turmoil. The only way out is for CBK to listen to the market, hike rates and act in a manner to suggest they are fighting inflation," said a dealer with one commercial bank who did not wish to be named.

"CBK also need to tighten liquidity. Doing (reverse) repos of unlimited amounts will not help the shilling's cause."

Bank forex

Traders said the shilling could weaken further in the next few days, though a move by the central bank to reduce the amount of foreign currency banks are allowed to hold could offer some support, as could dollar inflows from the tourism sector.

But some dealers said the central bank's move to reduce exposures could make the market illiquid and increase the shilling's volatility.

"The shilling could continue weakening in the days to come undermined by world economic factors, the energy sector and the current food crisis," said Bank of Africa in its daily report to its clients. Parts of Kenya have been hit by drought.

"However, some reprieve could come from the inflows from the tourism sectors and also policy measures being undertaken by authorities like reducing the amount of exposure banks can hold on the trading book."

The tourism sector is expected to increase dollar receipts to east Africa's biggest economy, whose peak visitor season starts this month.

"Investors want to move to (safe) havens so high-risk assets like the Kenyan shilling, South African rand and the Ugandan shilling are suffering," Sameer Lagadia, head of trading at Diamond Trust Bank, said.

(Reuters)