Shilling nears 100 to the dollar amid euro jitters

The shilling nearly touched the 100 unit psychological exchange rate to the dollar Thursday, the third day in a row when it sank to a record low. (Read: CBK sells dollars as shilling drops to new low)

The currency exchanged at 99.90 to the US currency, weighed down by heavy global demand for dollars as investors dumped euro denominated assets.

The currency lost more than two units in one day having closed at 97.70 on Wednesday, triggering uncertainty in the market with currency traders saying they could not predict when the shilling would stabilise.

Key driver

“We closed trade at 99.90 against the US dollar, with the key driver being the high dollar demand sparked by the euro woes,” said Mr Kennedy Butiko, a senior trader at Bank of Africa.

Kenya Commercial Bank, Cooperative Bank and Commercial Bank of Africa quoted the shilling at 99.70, 99.55 and 99.10 to the dollar respectively.

Demand for the greenback intensified after the US Federal Reserve in a statement yesterday fuelled concerns that the global economy could be headed for another recession.

Currencies in the developing countries, Kenya included, tend to suffer when demand for the greenback increases globally on fears that frontier markets could emerge as the biggest losers. “There are significant downside risks to the economic outlook, including strains in global financial markets,” said the US Federal Reserve.

Strong signal

Traders said the market experienced panic buying of dollars from across all the industries on expectations that the currency is headed towards the one hundred mark in a few days.

Supply of dollars is also reducing as more people are holding dollars in anticipation for a further slip towards the 100 mark.

“Importers have realised the CBK could not be having the muscles to support the shilling and are, therefore hedging, against subsequent depreciation,” said Mr Gerishon Kanori, a dealer at Bank of Africa.

The dollar is growing more expensive day by day, making it more difficult for the CBK to finance purchases of foreign exchange reserves.

The CBK said it would not inject liquidity into the money market a day after selling reverse purchase agreements worth Sh15.3 billion, according to Reuters.

Analysts said the current flight to the dollar by investors as the dollar rises on Euro zone debt fears is giving room for speculators with volumes to bet on weak currencies of third world economies of which Kenya is included.

“The CBK is also in the darkness because the shilling is being buffeted from both with and without,” said Samuel Gichohi, senior research analysts at NIC Securities.

The dollar and other safe havens such as the Japanese yen jumped on concerns global growth is stalling after the Federal Reserve said yesterday it saw “significant downside risks” to the U.S. Economy, spurring demand for safer assets.

Market players cautioned that the continued weakening of the shilling could be followed by a sharp correction in the coming days in what could hurt those holding high volumes of hard currencies.

Unlike other importers, manufacturers of cement who only import coal, a cheaply priced commodity said their exports in the regional markets are doing well, protecting them against high cost of doing business in the country currently.

A slump in the US economy, the biggest of consumer of crude oil in the world could have the effect of reducing oil prices giving a reprieve to third world economies that are currently fighting imported inflation.

This also means that demand for exports from Kenya would be suppressed as consumers in the developed markets loose their purchasing power.