The shilling was supported by agricultural inflows and the central bank's sale of greenbacks to commercial banks in the previous two sessions after the shilling slid.
At the 1300 GMT market close, commercial banks posted the shilling at 86.40/60 per dollar from Monday's close of 86.50/70.
"There were some agricultural flows in the market," said Peter Mutuku, head of trading at Bank of Africa. "The bank sold dollars yesterday, but I did not see them in the market today."
Tea, Kenya's leading hard currency earner, is usually auctioned every Tuesday at the port city of Mombasa.
Mutuku said the shilling had weakened due to dollar demand after the holidays and he did not rule out any further dollar injection in coming sessions.
Chris Muiga, a senior trader at Kenya Commercial Bank, said that the weakening of the shilling had forced the central bank's hand to sell an unspecified amount of dollars in the market.
The bank has fostered stability by using tools such as repurchase agreements to soak up excess liquidity from the market, and by building up its hard currency reserves.
The country's official usable foreign exchange reserves edged down to $5.369 billion last week from $5.396 billion a week earlier, the central bank said.
The market is also awaiting the central bank's rate decision when policymakers meet on Jan. 10, for further insights on the likely direction of the shilling, traders said.
The central bank is expected to cut its benchmark lending rate by one percentage point to 10 percent to stimulate the economy, a Reuters poll showed on Tuesday.
"Right now they can either support the economy by reducing rates or support the currency by keeping liquidity tight," said Muiga.
In stocks, the benchmark NSE-20 share index rose 0.8 percent to 4,247.74 points, hovering at a 22-month high.
Faith Atiti, an analyst at NIC Securities, said the bourse outlook remained positive on the back of lower inflation and an anticipated interest rates cut to boost economic growth.
Shares in leading telecoms provider Safaricom, closed 4.7 percent higher at 5.60 shillings, after rallying 9.4 percent to a new 28-month high of 5.85 shillings.
"The telecommunication firm is expected to report strong results backed by increased voice revenues following a 33 percent tariff increase in the year," Atiti said.
East African Breweries, the country's leading brewer, closed 2.9 percent up at 280 shillings a share after jumping 8.5 percent to an all-time high of 295 shillings earlier in the session, largely driven by foreign investors buying the shares before its half-year results.