Heavy dollar demand weakens the shilling

Goldfiled Forex Bureau
A customer at the Goldfiled Forex Bureau where the US dollar traded at Kshs 83 buying and selling at Kshs 84.50. December 27, 2011. PHOTO | DIANA NGILA | NMG 

The shilling weakened further against the US dollar Wednesday to touch the 101 level on a backdrop of heavy buyer demand for the greenback that outweighed support from diaspora and export inflows.

Commercial banks traded dollars at an average of 101.05 in the morning, before the shilling regained some ground in the afternoon to exchange at an average of 100.95 to the Us currency.

The shilling had opened the day trading at 100.85 units to the dollar.

Dealers said that dollar demand was coming from the energy and manufacturing sectors, starting an early build-up of the end month dollar demand spike normally seen in the market.

The shilling has been weakening progressively for the past week, ceding 1.4 percent against the dollar since it touched a three-and-a-half-year high of 99.60 on March 12.


“The shilling traded north as foreign currency demand by the importers overwhelmed the dollar suppliers. We expect the local currency to continue being under pressure as dollar demand continues to pick up amid increased vigilance by the Central Bank of Kenya,” said Commercial Bank of Africa in a treasury note.

During its gaining streak earlier this month, dealers had noted that buyers were holding back from taking up dollars to make an exchange gain on the stronger shilling, meaning that some of the current buying activity could be the result of the pent-up demand.

Healthy inflows

Analysts have, however, remained bullish on the shilling, with an expectation that demand and supply will at some point balance out due to the continued healthy inflows from the diaspora, horticulture exports and tourism.

Importers will still keep a wary eye on the exchange rate though, having enjoyed a brief period of exchange gains earlier this month on the stronger shilling.

Motorists will also pay higher for fuel if the current round of depreciation persists, which would inflate the import cost of petroleum at a time when the price of crude in the international market is also going up.

Exporters on the other hand stand to gain, getting more shillings for their sales that are paid for in dollars.