The local unit reached the highest since the Hong Kong Monetary Authority introduced three refinements to the linked exchange rate system in May 2005. They included setting the Hong Kong dollar trading band at between HK$7.75 and HK$7.85.

US dollar forward rates against the Hong Kong dollar also fell to a deeper discount to the convertibility limit. The one-year forward outright quote for the dollar is HK$7.735, meaning a buyer of US dollars yesterday could sell the greenback in the spot market and save the difference.

'The local currency market was flush with liquidity on speculative fund inflows,' said Law Ka-chung, the chief economist of the Bank of Communications.

'Rumours [of the depegging] sometimes circulated in the market. Some traders bet on the belief the Hong Kong dollar would strengthen, particularly as [the gap] between share prices in Shanghai and Hong Kong narrowed faster last week.

'If there is an arbitrage mechanism between the two bourses, chances are there would be one between the yuan and Hong Kong dollar also.'

An HKMA spokesman said there were no plans to change the city's currency and the government was committed to maintaining currency stability under the linked exchange rate system.

Short-term Hong Kong interbank offered rates, the benchmark interbank lending rates, hovered at high levels due to the spate of initial public offerings limiting market liquidity. Longer-term interbank rates softened due to the inflow of funds.

Overnight Hibor was unchanged at 4.5 per cent. The three-month rate fell to 4.9 per cent from 5.2 per cent.