The Kenyan shilling KES= edged up against the dollar on the back of higher coffee and tea prices at auctions this week, but signs of a drought in the country could limit the currency's gains, traders said on Thursday.

 At 0729 GMT, leading commercial banks posted the shilling at 80.85/95, up from Wednesday's close of 80.95/81.05.

 Tea and coffee exports are important sources of hard currency for the east African nation. The average price of the top grade of tea ticked up to $3.88 per kg this week while coffee prices shot up.

 In the short run, that is a boost for the shilling, said Solomon Alubala, head of trading at Co-operative Bank.

 He said the shilling could strengthen further, with 80.70 seen as the next target.

 Signs of a drought around the country could curb the gains, Alubala added, because it may reduce tea and coffee output.

 A dry spell has just begun in Kenya. A fall in tea and coffee output could also have an inflationary impact. Kenyan inflation rose in December to 4.5 percent from 3.84 percent in November.

 Dickson Magecha, a trader at Standard Chartered Bank said the shilling's move was also supported by a weaker dollar in global markets after the euro gained against the U.S. currency.

 The Central Bank of Kenya was being watched keenly due to its frequent hard-currency purchases in the market to rebuild reserves and supply the government with funds for the payment of bills, Magecha said, adding the another purchase could weaken the shilling.