At 0732 GMT, commercial banks quoted the shilling at 85.05/25 per dollar, 0.4 percent stronger than Wednesday's close of 85.40/60.

"The flow seems to have turned and guys are in a bit of a rush to sell dollars and unwind positions. Importers had bought (dollars) in a panic last week and now the demand side is low," said Dickson Magecha, a trader at Standard Chartered Bank.

"I would expect the shilling to gain further ground, not forgetting that the (debt) yields have turned upwards."

Yields on government paper, which have tumbled in primary auctions in recent weeks along with a falling inflation rate, turned higher at auction on Wednesday, where the yield on 182-day Treasury bills rose for the first time since January.

Traders expected the shilling to trade in the 84.80-85.70 range for the reminder of this week.

The Central Bank of Kenya (CBK) maintained its benchmark interest rate at 18 percent for the sixth straight month on Tuesday, and introduced longer tenure repurchase agreements to help mop up excess liquidity and support the shilling.

The regulator said it was in the market to soak up 4 billion shillings ($46.8 million) on Thursday in 7-day, 14-day, 21-day and 28-day repo tenures.

The shilling has fallen around 0.2 percent this year, having recovered from a five-month low of 87.80 per dollar hit last Thursday on the central bank's liquidity soak-ups and direct dollar sales to commercial banks.

Traders said capital flight from local markets as investors rattled by a possible Greek exit from the euro zone sold riskier assets in emerging and frontier markets last week was still weighing on the currency.

"I don't see us taking out the 84.80 mark as the global risk is sill there. After these flows leave we could head back to around 86," said a trader at one commercial bank.