Foreign exchange dealers have been grumbling that fundamentals dictate the shilling should be stronger but that central bank interventions have tightly capped its gains.

"The central bank is not keeping the shilling weak and has no intentions or capabilities of doing that," Governor Njuguna Ndung'u told Reuters.

"The central bank has to accumulate forex reserves to the legal level and also to meet government external obligations. This is what is happening."

The Central bank has bought more than $420 million this year.

Ndung'u said the bank did not support a particular level or direction of the exchange rate in Kenya's floating rate regime.

"The current Kenya shilling movements reflect the international relative price movements of the dollar, the pound and the euro. These are the main currencies that drive our market," he said.

The shilling strengthened last week, helped by a general rise in risk appetite and a positive economic and political backdrop in east Africa's biggest economy.

At 0730 GMT, commercial banks posted the shilling at 80.90/81.00 per dollar from a weaker 81.00/81.10 earlier.

According to a central bank survey in July, 51 percent of banks polled expected the rate to weaken by 1-3 percent in the remainder of 2010 due to increased imports, risk aversion and low interest rates.

A Reuters poll showed last week that perception is for the shilling to end the year at a median of 80.25.

One trader, who declined to be named, said the central bank (CBK) purchases were killing the market every morning before 0830 GMT, when the bank unveils its purchase orders.

"The market could read it as a deliberate intervention to weaken KES (shilling). Why are they more active when KES is stronger and set to rally?"

The shilling eased on Monday shortly after the central bank entered the market looking for $8.0 million.

"If their goal is reserves management then they are accumulating reserves at the worst possible price on a regular basis," the trader said.

Reserves stood at $3.414 billion last week, equivalent to 3.52 months of import cover and below the 4.0 months statutory requirement. In coming years, Kenya will have to raise cover to 6.0 months, in line with other east African nations.

Exporters in Kenya's agriculture-based economy and the key tourism industry are happy that the shilling has been generally weak. However, importers say it is hurting their businesses.

Another trader said the main problem was that central bank was using an auction to raise foreign exchange -- which has the effect of grinding the market to a halt -- instead of buying discreetly by allowing banks to call in with sale offers.

"CBK seems to persistently come into the market when the shilling appreciates, halting KES rallies and giving the market the impression that they are supporting a particular level," said the dealer, who also declined to be identified, said.