The Kenyan shilling extended its tumble to touch a new record low of 93.58 against the dollar on Monday, while the benchmark share index fell 2 percent as the global sell-off of emerging and frontier assets hit local markets.
The Central Bank of Kenya, which injected 15 billion shillings through reverse repos, said it was considering limiting banks allowed foreign exchange exposure as a percentage of core capital to stem the shilling's decline.
"In Kenya it is set at 20 percent, this is what has given commercial banks massive room to speculate and drive the market beyond what the fundamentals are showing," Njuguna Ndung'u told Reuters in a statement.
At close of markets, commercial banks quoted the shilling at 93.40/60 against the dollar, weaker than Friday's close of 92.80/90. Technical analysis showed dollar resistance at 94.00.
Traders said the shilling's slide was mostly on the back of a global tumble of the euro and other major currencies.
"This (fall) goes way beyond the local scene. Because of factors beyond our borders there is nothing we can do now," said Dickson Magecha, a senior trader at Standard Chartered Bank.
"(The reverse repo) would be shilling negative because it is adding liquidity. The move we've seen is also on the back of manufacturing and telecoms dollar demand."
The shilling has lost 16 percent against the dollar this year, battered by strong dollar demand, falling appetite for riskier currencies in frontier markets like those in east Africa and market doubts over the Central Bank of Kenya's monetary policy direction.
Traders said panic dollar buying by clients who were hoping the shilling would recover but decided to cut their losses after it depreciated further fueled the shilling's weakness.
"I think there is a bit of panic buying from customers who were waiting for it to come lower...they have given up," said Julius Kiriinya, a trader at African Banking Corporation.
In stocks, the benchmark NSE-20 Share index tumbled 2.05 percent, the biggest fall in five months, to 3,645.12 points as the downgrade in U.S. debt sparked a global sell-off in equities and a flight to safe haven assets such as gold.
"A big chunk of the fall today is due to what is happening in the world. We've seen a lot of foreign sales on big caps," said Mwenda Rarama, an analyst at Kingdom Securities.
"Foreign investors have been offering support for this market, but with the shilling having hit a new low and the world suffering, then we expected some flight."
Analysts said local investors were already hit hard by the rising inflation rate, up for the ninth straight month to 15.53 percent in July.
Shares in mobile operator Safaricom fell 4.23 percent to 3.40 shillings a share, while Kenya Commercial Bank, east Africa's biggest bank in asset terms, dropped 3.33 percent to 21.75 shillings a share.
Corporate and government bonds worth 1.847 billion shillings were traded, down from 3.115 billion shillings traded on Friday.