Traders said the shilling should gain further as a weekly tea auction on Tuesday would attract inflows of dollars that would be converted to shillings after the sale.

Kenya is the world's leading producer of black tea, and the crop is the east African country's top foreign exchange earner. Weekly tea auctions are conducted in dollars and attract major international buyers.

At 0752 GMT, the shilling traded at 85.00/10 to the dollar, from Monday's close of 85.20/40, and from 84.80/85.00 earlier in the session.

"When (banks) build long dollar positions then there is no demand and interest rates are slowly going up, (banks) start cutting their positions," said Ignatius Chicha head of markets at Citibank.

The weighted average yield on Kenya's benchmark 91-day Treasury bill rose to 8.093 percent at auction on Thursday, from 7.647 percent previously.

Traders said they were cautious on the prospects for another interest rate cut to shore up the economy when the Monetary Policy Committee (MPC) meets in November given that inflation fell in September and that would put pressure on the shilling.

Inflation fell to 5.32 percent year-on-year, from 6.09 percent in August.

Policymakers slashed the benchmark lending rate last month by a record 350 basis points to 13 percent.

Traders said most of the dollar demand from importers for end-month obligations came mainly from the oil and energy sectors and had been met last week.

Chris Muiga, a senior trader at Kenya Commercial Bank, said dollar inflows from the weekly auction were expected to support the shilling.

Earnings from tea exports are expected to rise 1 percent this year to 110 billion shillings ($1.29 billion), after being affected by poor weather conditions in the first half of the year.