The shilling on Wednesday edged closer to 108 units against the US dollar for the first time in nearly a month, pressured by higher demand for the greenback than supply.
The Kenyan currency was quoted at 107.52 on Tuesday, the weakest levels since April 26.
“The shilling is experiencing temporary weakness as we have been seeing more demand than supply (for the dollar) in recent days. It’s difficult to pin-point the sector which is driving demand,” said a forex trader at a tier one bank.
A weaker shilling means importers spend more to bringing in goods such as petroleum products and raw materials for factories, a development which may result in price increases for consumers in a net import economy.
Exporters of tea, horticulture and coffee who are largely paid in dollars, on the other hand, benefit from depreciation of the Kenyan currency as they end up earning more when they exchange the payouts at banks or forex bureaus.
Mr Churchill Ogutu, who heads research at Genghis Capital, said the pressure was likely to ease in the coming months, citing expected inflows from the International Monetary Fund ($410 million or Sh44.28 billion) and the World Bank Group (Sh82.5 billion) before end of next month.
“Ideally, there’s a supply-demand mismatch for the dollar and that’s what has propelled the shilling towards 108 levels to the dollar,” Mr Ogutu said. “I see this easing in the short-term on the expected inflows from the IMF and World Bank.”
The Central Bank of Kenya has the option of deploying its sizeable foreign exchange reserves to iron out volatility on the shilling. The dollar reserves stood at $7.594 billion on May 13, a 1.72 percent drop from recent highs of $7.727 billion on April 22.