The shilling was slightly firmer on Wednesday as dollar demand from commercial banks eased, while rising yields on government debt was seen boosting the local currency further.
At 0842 GMT, commercial banks quoted the shilling at 3,285/3,295, stronger than Tuesday’s close of 3,290/3,300.
“Activity in the market is sluggish as demand in the interbank is very weak,” said Faisal Bukenya, head of market making at Barclays Bank.
Bukenya said if rates on Treasury bills climb further at an auction due on Wednesday, the shilling could extend its gains.
“Higher yields will help lift the sentiment as the market will be expecting an increase in offshore inflows,” he said.
A Total of 170 billion shillings ($52 million) worth of debt notes of 91-, 182-, and 364-day tenors are scheduled for sale.
Rates on Ugandan debt have been rising, underpinned by a tightening of the monetary policy stance by the central bank in part to shore up the shilling.
Dollar sales by the central bank have also helped stabilise the local currency after it plunged through a series of record lows in recent weeks, pressured by soaring dollar demand.
Most traders say increased public spending ahead of elections next year and a growing current account deficit are likely to keep the shilling bearish in the coming months.
Uganda’s current account deficit was 8.5 percent of gross domestic product in fiscal year 2014/15 (July-June) and is expected to reach 10.3 percent in 2015/16.