* Shilling slides to all-time low of 87.80 vs dlr * Local currency traders eye 88 as next dlr resistance * Higher interest rates may support shilling (Adds quotes, details) By Beatrice Gachenge and Richard Lough NAIROBI, June 7 (Reuters) - Kenya's shilling KES= touched an all-time low of 87.80 to the dollar on Tuesday, triggering panic buying, before it recouped some losses after the central bank said it was staying out of the forex market. CBK04 The shilling has fallen 8.31 percent this year on steady central bank buying of hard currency and heavy dollar demand from the energy sector to pay higher oil prices amid unrest in the Middle East that has also cut Kenya's tea exports to Egypt. Traders said the currency of east Africa's biggest economy was now targeting the 88 level to the greenback. At 0909 GMT commercial banks quoted the shilling at 87.55/65 against the greenback weaker than Monday's close of 87.00/10. "It is just a matter of time before we break 88 unless something good happens," said Steve Lagat a trader at CFC Stanbic Bank. But Lagat said heavy inflows from foreign investors and agriculture coupled with expectations of higher interest rates would lend the local unit much-needed support. In a flurry of early trading, the shilling tumbled through its previous record low of 87.15 hit on May 18. "Corporate demand has been building since Friday and banks were short on dollars, and there were no inflows to match that demand", said Duncan Kinuthia, a senior trader at Commercial Bank of Africa. "We have seen a lot of dollar demand from the energy sector and interbank players covering their short positions this morning," Kinuthia added. "Breaking the dollar resistance level of 87.15 caused interbank players to cover short positions. The dollar resistance level is now 88.00," said Dickson Magecha, a trader at Standard Chartered. The average yield on Kenya's 91-day Treasury bills jumped to 8.798 percent at auction this week from 7.942 percent previously, while the yield on six-month paper leapt to 9.949 percent from 5.444 percent. [ID:nLDE7511SA] Typically, higher interest rates attract foreign investors looking for better returns on their investment. Kenya's central bank has bought $76 million of foreign currency this year in euros and dollars to boost its reserves. The central bank has said it would mop up 500 million shillings ($5.74 million) through repurchase agreements, but traders said that was too little to support the shilling. The shilling has also been under renewed pressure since last week's decision by the central bank to raise lending rate KECBIR=ECI by a smaller-than-expected 25 basis points to 6.25 percent. [ID:nLDE74U1TR]

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