Squaring of short positions ahead of the weekend, when commercial banks usually align their books, also drove the dollar higher.

Traders said the shilling getting back up to the key 90.00 level had brought in some importers, who perceived that level as attractive and bought dollars to cover their obligations at the end of the month.

At 0800 GMT, commercial banks posted the shilling at 90.40/70 against the dollar, down from the previous day's close of 90.00/30.

Traders said the shilling was likely to resume its recent bullish form once the end-of-month importer appetite was satisified, due to a liquidity crunch that has made it hard to fund dollar holdings.

"Anything you have, you have to liquidate into Kenya shillings because it doesn't pay to hold dollars at 30 percent," said a senior trader with a leading commercial bank.

An acute funding squeeze has sent rates on the interbank market soaring to above 31 percent, prompting banks to cut their dollar positions and propelling the shilling higher.

The shilling has risen 15 percent off its record low of 107 on Oct. 11 after policymakers shifted to a more aggressive monetary stance to fight inflation and currency volatility.

"When the present (dollar) demand is taken out, those positions will become even shorter," said the trader, adding that the shilling was likely to head to the 88.50 level soon.