The Kenyan shilling strengthened against the dollar on Tuesday after interbank overnight lending rates pushed higher on the back of a liquidity crunch in the domestic money markets.
At 0640 GMT, commercial banks posted the shilling at 100.85/95 per dollar, up from Monday's closing rate of 101.10/20.
"It is all about liquidity," said a trader at a commercial bank. Tight liquidity usually makes it more expensive for traders to bet against the shilling hence offering support.
The weighted average overnight lending rate for banks rose to 23.0308 percent on Monday from 22.9352 percent on Friday as the lack of liquidity started to bite.
Policymakers adopted a monetary tightening stance in June, raising the benchmark lending rate by a total of 300 basis points since then, to curb volatility in the foreign exchange market.
The central bank has also been aggressively mopping up liquidity through its open market operations.
That stance had started to pay off with the restoration of stability in the foreign exchange rate, the central bank said last week.