The Kenyan shilling held at a near 13-month high on Tuesday with traders saying it could break past Sh82 per dollar this week.
Local lending rates rose with the weighted average interbank rising 80 basis points to 26.2 percent on Monday, above the Central Bank's discount window rate of 24.0 percent.
Players held on to shillings with the intention of buying at upcoming sales of government debt.
At 0749 GMT, commercial banks quoted the shilling at 82.20/40 against the dollar, barely changed from the 82.15/35 Monday's close.
"The liquidity tightness has been caused by the bond auctions. There is no point of holding dollars when interest rates are so high on the shilling," said a trader at one commercial bank.
Technical charts showed resistance to further gains for the currency at Sh82 per dollar and traders said a breakthrough that could see it target Sh81.50.
Kenya's acting Finance Minister Robinson Githae, rowed back on his previous comment on capping the shilling's gains higher than the 82 level, and said he prefers a stable shilling at any level instead.
The Central Bank of Kenya is selling a one-year bond worth 10 billion shillings ($121.3 million) this month, along the weekly Treasury bills, that traders said could receive high demands investors undercut each other for the high yields.
Rates on Government securities, which rose to above 20 percent in December after the central bank raised interest rates to prop up the currency and fight high inflation, have attracted huge demand this year, pushing yields slightly lower.
"Previously there was a psychological barrier of around Sh82 level. But after the minister clarified that he preferred a stable currency we could see it gain beyond that," said Solomon Alubala, head of trading at Co-operative Bank.
-Reuters
