The currency began trading at Sh99.55 after closing at Sh99.20 on Thursday against the greenback.
Analysts said it could hit the Sh100 mark before the close of trading on Friday, even after the Central Bank of Kenya (CBK) on Wednesday injected Sh15.3 billion worth of dollars into the market with little effect.
A source familiar with the workings of the Monetary Policy Committee (MPC) said it was too late to intervene as the government did not have the resources to defend the currency.
Some analysts want CBK to pump more dollars into the market to improve liquidity levels but the source, who did not wish to be named, said this was not an option, since the country’s forex reserves as at September 9 stood at $3.9 billion.
“Intervention is not a solution right now. The country’s reserves are currently equivalent to four months import cover so if CBK were to sell more dollars, then what will the country be left with?” he wondered.
Although he reckons the shilling has been reacting to a strong dollar and gloomy global markets, he said poor communication from CBK and mixed signals to the market are also to blame.
“The dollar is very strong and as you can see, the shilling is stable against for instance the euro and the sterling pound. However, you cannot say you will do nothing. The market will definitely react to that,” he said in reference to the CBK’s insistence that it would not act to save the local unit.
CBK Governor, Prof Njuguna Ndung’u has insisted that the local currency fundamentals were strong and exuded confidence that the market would self-correct particularly when the uncertainties in the Euro zone are addressed and the volatility in the international market stabilises.
On this basis, CBK has in the past three months announced what analysts term as a ‘half-hearted’ policy stance that have done little to give direction to the market.
Other signals such as its indecision on the Discount Overnight Window, which at one point was raised to eight percent, reversed to its original rate two weeks later and had a new formula announced a few days later have only served to further confuse the market.
The shilling has twice breached previously set psychological levels of Sh90 and Sh95.
Recommendations that the Central Bank should take bold and drastic action such as raising the benchmark Central Bank Rate (CBR) by more than 200 basis points have largely been ignored.
The result has been the perception that the currency is on a ‘one-way’ risk has continued to be fuelled.
The free fall is also making a mockery of the MPC’s decision to hike the Central Bank Rate by a mere 75 basis in last week’s special meeting.
The gloomy picture is now being reflected in the Nairobi Stock Exchange which itself is witnessing a bear run that has seen foreign investors adopt a cautious approach.
Retail investors have largely stayed away from the market. The net effect has been a huge blow to the equities market.
Meanwhile, the dollar extended its gains against most Asian units on Friday as traders sought its safe haven from a second straight day of market sparked by fears of another recession.
With the greenback surging on growing risk aversion some central banks intervened in forex markets to support their currencies amid fears of inflation at home.
The euro recovered from 10-year lows against the yen but its outlook remained bleak after the US Fed warned of significant risks to the US economy and as the eurozone struggles to keep Greece’s debt crisis from spreading.
The dollar rose to Sg$1.3006 from Sg$1.2878 and to Tw$30.59 from Tw$30.34.
It was also at 1,195.00 South Korean won from 1,179.57, despite traders saying the South Korean central bank had stepped in to support the unit over the week.
However, it did fall to 8,973.75 Indonesian rupiah from 9,133.75, with Dow Jones Newswires saying the central bank in Jakarta is believed to have intervened.
The commodities-linked Australian dollar was also trading sharply lower on Friday, falling to 97.89 US cents, well down on its close of US$1.00 the day before.
Since breaching parity in October last year the currency has rallied consistently near or above the US$1.00 mark, hitting a record of US$1.1081 in July.
The euro edged up tentatively, sitting at $1.3511 in afternoon trade, from 1.3470 late Thursday in New York. It was changing hands at 103.11 yen, after sinking to a 10-year low of 102.60 yen.
The single currency is under pressure as strikes over new budget cuts swept across Greece on Thursday, with doubts growing that Athens can implement new EU-IMF measures needed to secure funds and avert a default.
In afternoon Asian trade, the dollar was up at 76.32 yen from 76.20 yen in late New York trade on Thursday.
Japanese financial markets were closed for a public holiday.
“The dollar has already strengthened quite a fair bit, and the trend will continue for a while,” said Simon Teo, a senior currency dealer at Phillip Futures in Singapore.
“Europe still has a lot of problems, pushing the euro currency lower. With the US dollar strengthening, it has a double effect on the euro.”
Singapore’s DBS Bank said the world is looking for leadership from the ongoing International Monetary Fund-World Bank annual meetings in Washington which gathers the world’s finance chiefs and central bank governors.
“Needless to say, market sentiment is at its most fragile since (the) Lehman crisis,” DBS said, referring to the collapse in late 2008 of US investment bank Lehman Brothers, sparking a global financial crisis that lasted well into 2009.
“More than ever, markets now need to see global leaders holding each other’s hands, and not pointing fingers at each other, to help restore stability to global financial markets and return the world to its recovery path.”
The heads of the World Bank and IMF on Thursday warned that Europe and the US needed to get control of their deteriorating economic crises or risk “suffocating” the global economy.
Against other Asian currencies, the dollar climbed to 43.78 Philippine pesos from 43.67 and to 30.84 Thai baht from 30.68.