NAIROBI (Reuters) - The Kenyan shilling extended its losses against a globally stronger dollar on Tuesday, dragged down by banks buying the U.S. currency to cover short positions, traders said. They also said they expected increased liquidity in the local market to push the shilling lower. At 0709 GMT, commercial banks quoted the shilling at 84.05/25 per dollar, 0.2 percent weaker than Monday's close of 83.85/84.05. "We've seen some activity from interbank players. I think guys are cutting back on their short (dollar) positions," said Dickson Magecha, a trader at Standard Chartered Bank. Technical charts show the shilling is likely to test a three-and-half-month low in the 84.40/50 region hit on Jan 31 in the short term, traders said. A surge in shilling liquidity due to debt redemptions and the central bank rejecting most bids at recent oversubscribed Treasury bill auctions jolted the local currency out of its recent lethargy. The central bank has mopped up 41.3 billion shillings since April 27, after the interbank rate plunged to 14.8 percent from 18 percent the previous day on the back of a liquidity surge. The weighted interbank rate fell to 15.2 percent on Monday, from 15.7 percent on Friday. Traders said global risk aversion, emanating from political turmoil in Greece that is fuelling speculation it may exit from the euro, would pressure the shilling too. "The continued weakening of the euro is expected add further pressure to the shilling," said the Bank of Africa in a daily report.

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