THE Central Bank sold an undisclosed amount of dollars early yesterday to support the local currency after it weakened to a new one-year low on strong importer demand for greenbacks, traders said.
The shilling fell 0.4 per cent to touch an intraday low of 87.80/88.00 to the dollar, last touched on Jan. 5, 2011, when it hit 89.00. It recovered to trade at 87.50/70 at 0713 GMT after the Central Bank sold dollars, and was still being quoted at the same level at 0739 GMT.
"The Central Bank came in to sell dollars again after the shilling touched 88," said a trader at one commercial bank. The Central Bank has pumped in dollars during seven different trading sessions so far this year to support the shilling.
Traders said the shilling had come under pressure from oil importers buying dollars to meet their end month supplies. "With the Central Bank's interventions, 88.00 is still the initial support level," said John Muli, a trader at African Banking Corporation.
Traders said liquidity had also tightened in the market with overnight interest rates on the interbank market rising steadily over 11 straight sessions to 6.67 per cent on Monday.
The Central Bank has also been mopping up liquidity using repurchase agreements (repo) since last year to support the shilling. On Monday, the bank received bids worth Sh2.7 billion for the Sh4 billion it had offered in repurchase agreements that day.
It accepted all the bids at a weighted average interest rate of 6.5 per cent. Traders said the Central Bank could effectively support the shilling through letting interest rates on repos to rise above 7 per cent to encourage banks to offload their liquidity. "Liquidity is somewhat tighter as bond payments fall due," Muli said.