KAMPALA The Ugandan central bank sold dollars to support the shilling on Wednesday after the currency weakened more than 1.8 percent during the session on fears of more aid cuts by Western donors over a law that toughened punishments for gays.
After tumbling in early business, the central bank intervened to help the shilling off its lows. By 0705 ET, the east African currency was trading at 2,495/2,505 to the dollar, still down 1.5 percent from Tuesday's close of 2,453/2,458.
It took a knock after Norway and Denmark said they would hold back donations because of the law that was signed by President Yoweri Museveni on Monday and other donors threatened to follow suit. The United States said it was reviewing ties.
"Players in the interbank market are exerting a lot of demand pressure mostly because of concerns over news of aid cuts in relation to the anti-gay law," said Faisal Bukenya, head of market making at Barclays Bank.
"The Bank of Uganda has intervened on the selling side to try to soak up the demand," he added.
Foreign aid is a key source of hard currency for Uganda and any cuts would hurt a vital source of dollars.
The United States, a major donor, condemned the law that punishes a range of homosexual offences with lengthy jail terms and imposes life imprisonment on perpetrators of so-called "aggravated homosexuality". It said it was reviewing relations.
Washington provides more than $400 million in assistance to Uganda each year, mainly in health.
Sweden's finance minister, Anders Borg, said on Tuesday that the new law "represents a financial risk" for Uganda.
The currency was also being weighed down by importers seeking hard currency.
"We're seeing significant recovery in demand by importers," said Sage Daniel Muganza, trader at Centenary Bank. "It's also adding to the pressure."
(Writing by Edmund Blair; Editing by Richard Lough)