Rises in the discount rate are seen lending support to the local currency. The central bank said on Tuesday that commercial banks seeking to borrow at its overnight window would be charged an interest rate of 13.87 percent, up from 11.34 percent on Monday and 6.25 percent on Friday.

At 0721 GMT, commercial banks posted the shilling at 92.65/85 to the dollar, slightly weaker than Monday's close of 92.60/80.

"Funding is an issue. We have seen a bit of (dollar) selling on the back of that (overnight lending) to get shillings," said Dickson Magecha, trader at Standard Chartered Bank.

The market is on the lookout for inflows from tea exports, which should also support the shilling, but traders said they did not anticipate substantial moves. Little greenback demand was expected.

"The tightening in the short run will have an impact on the foreign currency side ... where we expect the shilling to strengthen," said Solomon Alubala, head of trading at Cooperative Bank.

Traders said it was more beneficial for banks to hold shillings, with the resistance for the local currency pegged at 92.00, while support was seen at 93 to the dollar.

Copyright Reuters, 2010