Kenyan Shilling Weakens to 17-Year Low on Food Importer Demand

Kenya’s shilling depreciated to the weakest in 17 years against the dollar on speculation corn and wheat importers were buying the U.S. currency to fund purchases.

The currency of East Africa’s biggest economy weakened as much as 1.9 percent, the biggest intraday decline since March 11, to 89.65 per dollar and traded 1.7 percent weaker at 89.50 by 12:57 p.m. in the capital, Nairobi. A close of this level will be the lowest since March 18, 1994, according to Bloomberg data. It closed at 88 on June 10.

Expansion is expected to slow to 5.3 percent this year, from 5.6 percent in 2010, as drought cuts agricultural output, Finance Minister Uhuru Kenyatta said on June 8. Kenya eliminated duty on wheat imports for one year, while the tariff on corn was cut to 10 percent from 50 percent for six months to cushion Kenyans from the rising costs of food, he said. Rainfall in the three months through May was “highly depressed and poorly distributed,” curbing agricultural production and hydropower output, the Kenya Meteorological Department said on May 26.

“The weakening of the shilling is being driven by speculation that businesses are preparing to switch to the use of fuel generators due to the failure of rain affecting hydro power production and the expectation of importation of corn and wheat by millers to meet the current shortfall in the country,” John Muli, a dealer at Nairobi-based African Banking Corp., said in a phone interview today.

‘Push to 90’

Kenya’s inflation rate, which jumped to a 25-month high in May, is expected to rise further this year as dry weather curbs agricultural production, central bank Governor Njuguna Ndung’u said on June 6.

The central bank will stay out of both the foreign-currency and repurchase-agreement markets, a bank official who could not be named in line with the bank’s policy, said in a phone interview today.

“Without central bank activity or verbal intervention we believe that a retreat is not on the horizon and a push through 90 is imminent,” Matthew Pearson, head of African equity products at Standard Bank Plc, said in an e-mailed note to clients today.

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