By Philippa Croome and Elias Biryabarema
KAMPALA (Reuters) - Uganda's currency tumbled on Wednesday on concerns that a new anti-gay law will damage relations with Western countries alarmed at what they see as a government-backed violation of human rights.
President Yoweri Museveni's approval of the law on Monday, imposing jail sentences of up to life for gay sex, reflects a gulf in social attitudes between conservative Africa and the West, with Washington saying the law complicated its "valued relationship" with Uganda and several European countries withholding aid.
The shilling fell 2 percent on Wednesday before Uganda's central bank intervened to stop the slide, after Denmark and Norway said they would hold back on aid and others threatened to follow.
The currency movement appeared to confirm the prediction by Swedish Finance Minister Anders Borg who said on Tuesday the law was a "financial risk" for Uganda. U.S. Secretary of State John Kerry said Washington would review its relations with Uganda.
But the financial, political and diplomatic risks could be limited.
Traders said the currency slide was likely to be short-lived because aid no longer granted to the government would enter the economy through other development projects. Denmark and Norway have suggested they would divert aid through other channels.
Politically, Museveni appears to be on safe ground, with a law that appeals to many in Uganda, one of 37 African countries where homosexuality is illegal.
"Ugandans and Africans in general look at the gay phenomenon as something alien and therefore new," said Arinaitwe Rugyendo, the editor of Red Pepper, a tabloid which splashed names and photographs of Uganda's "top homos" on its pages this week.
"Our aim is news," he said, denying that the coverage could jeopardize the people "exposed" as gay. "This coverage will not endanger anyone," he said.
Activists said the law and media coverage had driven gays into hiding.
"Many of them have switched off their phones and are trying to keep a low profile," said gay rights campaigner Kasha Nabagesera, whose name was on Red Pepper's list.
On the streets of the capital Kampala, an opposition stronghold in recent elections, Red Pepper's campaign to out homosexuals has split opinion.
"I support the paper. Just expose all the ills in society. Thieves are exposed in newspapers, so why not gays?" said social worker Bernard Nuwagira.
Museveni's stance - and the angry reaction from the West - may boost popular support among young people reaching voting age with no memory of him as a freedom fighter who brought stability to a troubled nation.
"Picking a fight with donors over (gay) rights both strengthens Museveni's claim to be bravely standing up to neo-imperial pressure, and appeals to a strong current of religious conservatism that can unite people," said Ben Shepherd, an associate fellow at London think-tank Chatham House.
The veteran leader, in power since 1986, has not said if he will seek re-election in 2016, but his party, which dominates power, passed a resolution this month urging him to run.
The law toughens existing punishments for anyone caught having gay sex, imposing life jail terms for "aggravated homosexuality" - including sex with a minor or a disabled person. An early draft had proposed the death penalty.
On the diplomatic front, Museveni may have calculated that outrage will be offset by Uganda's strategic value as it helps battle Islamist insurgents in Somalia and contributes to other military campaigns that have won praise from the West.
He may also be counting on future oil production which could start in 2016 and ease his nation's dependency on aid.
Uganda showed it can weather aid cuts when donors shut off some funds in 2012 over graft concerns. The government revised down its growth outlook but the economy still expanded by 5.8 percent in the 2012-13 fiscal year.
This time, currency traders anticipated the aftershocks would be short-lived.
"The fears over aid cuts aren't really running so deep," said David Bagambe at Diamond Trust Bank, adding that the shilling's weakness on Wednesday was also due to importers' demand for dollars.
"In any case, some of the aid is being diverted to civil society organizations rather than budget support. The money will still be flowing into the same economy."
(Writing by Richard Lough; Editing by Edmund Blair Robin Pomeroy)