The rate fears proved to be correct as the Hong Kong Monetary Authority said after the market closed that it would make a big change to the currency board system, specifically aimed at bringing Hong Kong's short-term interest rates back up in line with rates in the United States.

Aside from introducing a ceiling for the local currency at $7.75 against the US dollar, the HKMA said it would also lower the floor for the Hong Kong dollar to $7.85 from $7.80.

The latter will be done over five weeks with the first move taking place on Monday, but it is likely to put additional downward pressure on the stock market, starting from today.

Yesterday, the Hang Seng Index fell 0.29 per cent, or 40.02 points, to 13,627.01, with turnover easing slightly to $14.7 billion from Tuesday's $17.67 billion.

HSBC accounted for a large portion of yesterday's index drop as the stock started to trade without the right to a dividend of about $1.09. Excluding that adjustment, the stock would have ended slightly higher, but it finished the day down 0.8 per cent at $123.50.

Among the 33 blue chips, 14 stocks ended higher on the day while 14 were lower and five unchanged.

Still, brokers said market sentiment remained weak, evidenced by the fact that Hong Kong had been unable to benefit from two straight days of gains on Wall Street. The biggest drags on the market were the reversal of the yuan revaluation speculation as well as the continued strengthening of the US dollar, they said.

Because of the peg, a stronger US dollar makes Hong Kong assets, such as property and equities, look relatively more expensive.

'I think the market will continue to drift down to try to find a lower support level, and hopefully, we will see some bargain hunting by medium-term investors at around 13,400-13,500,' said Ben Kwong Man-bun, a director of investment services at KGI Asia.

Mid-tier developer Hysan Development was among the top property decliners, falling 1.26 per cent to $15.70. Sun Hung Kai Properties dropped 0.67 per cent to $74.

A slight rebound in the price of crude oil to above US$49 gave the oil producers some respite, allowing CNOOC to advance 0.65 per cent to $4.10 and PetroChina to close 1.06 per cent firmer at $4.75.

Shipping stocks were among the biggest losers for the second day, however, amid concerns about a potential escalation of the textile trade dispute between China and the US.

Container shipping firms were also reacting negatively to indications there will be only modest increases in freight rates this year and next, with China Shipping Container Lines dropping 2.96 per cent to $3.27 and Orient Overseas (International) falling a further 7.56 per cent to $33 after giving up 5.05 per cent on Tuesday.

Ports operator China Merchants rebounded from Tuesday's drop, finishing 1.38 per cent higher at $14.65. Data showed cargo volumes at the city's port terminals rose 5.9 per cent last month from April last year after shipments of Chinese-made goods to Europe and the US increased.

Cosco Pacific, the port operating unit of China's largest shipping company, added 0.65 per cent to $15.40.

Macau gaming play Melco fell as much as 12.6 per cent intraday after placing 70 million new shares at $18.25 each - a 5.9 per cent discount to the previous close - but recovered slightly to end down 8.76 per cent at $17.70.

'Investors aren't happy about the dilution of earnings per share, but they are even more concerned about the size of the total investment,' Fulbright Securities general manager Francis Lun Sheung-nim said.

The company's planned $8 billion investment in a casino and hotel complex it was developing with Australia's Publishing and Broadcasting on Macau's Cotai Strip suggested the firm would need to raise more funds on top of the $1.27 billion it secured through the placement, Mr Lun said.