HK dollar falls to 7.80 on interest rate plays

PUBLISHED : Tuesday, 18 December, 2007, 12:00am
UPDATED : Tuesday, 18 December, 2007, 12:00am

The Hong Kong dollar yesterday fell to HK$7.80 to the US dollar, the lowest level since August, mainly due to interest rate arbitrage.

The Hong Kong dollar was at HK$7.8007 in late session after it traded at about HK$7.80 for most of the day, against HK$7.7983 on Friday.

Dennis Wong Wai-hung, a senior manager at Hang Seng Bank, said there was less demand for the local currency after the completion of a series of initial public offerings and, with upcoming issues lacking appeal, interest rates were being kept low.

The main reason for the decline of the Hong Kong dollar was people taking advantage of the interest rate differential, he said.

The overnight bank rate yesterday stood at 2.75 per cent in the late session while the one-month interbank rate was at 3.65 per cent. These marks were more than one percentage point lower than US dollar interest rates, which was at 4.25 per cent for overnight loans and 4.95 per cent for one month. This prompted investors to sell Hong Kong dollars and buy US dollars to take advantage of the higher US rates.

Another reason for the decline was an outflow of money from stocks as regional equity markets declined yesterday after falls in the United States and European markets on Friday. The Hong Kong dollar opened lower before the start of trade on the domestic stock market.

'There's some money outflow but the magnitude was modest,' said Law Ka-chung, the chief economist and strategist at Bank of Communications' Hong Kong branch.

Mr Law said the outlook for the local currency depended on the performance of the stock market.

'The Hong Kong dollar is likely to remain weak if the market [Hang Seng Index] falls below 26,000 points,' Mr Law added.

However, he said it was unlikely the local currency would fall to as low as 7.85 to the greenback, triggering the de facto central bank to step into the market.

Under the linked exchange rate system, the Hong Kong Monetary Authority is committed to keep the currency trading between HK$7.75 and HK$7.85 to the US dollar.

'I don't think there would be a massive money outflow [to trigger the HKMA's intervention] unless there's a big correction in the stock market,' said another analyst, adding that buyers would move in when the currency fell to about HK$7.82.

Meanwhile, the yuan fell 0.21 per cent against the US dollar yesterday, closing at 7.3873 from 7.3715 on Friday.