The shilling, which is down more than 3.5 percent this year, has bounced off a record low of 107 hit on Oct. 11 after the central bank tightened monetary policy to combat inflation and exchange rate volatility.

"With most companies closing for the Christmas festive season, we expect the local unit to continue firming in the days to come, aided by the tightening in shilling liquidity," said Bank of Africa in a daily report.

At 0645 GMT, commercial banks posted the shilling at 83.45/65 against the dollar, a touch weaker than Tuesday's close of 83.40/60.

Market players said the shilling was facing resistance at the 83 level.

The average daily interbank lending rate rose to 22.7 percent on Tuesday from 20.3 percent in the previous session. The central bank's tightening of monetary policy has squeezed liquidity and forced banks' to compete for scarce shillings, increasing the cost of holding dollars.