Hong Kong dollar near 17-month low ahead of Fed rate decision

Hong Kong’s dollar traded near its weakest level in 17 months, reflecting an increasingly nervous market ahead of the upcoming Federal Reserve policy meeting and expectations that the timing of a rate rise in the city may be brought forward.

The currency fell as low as 7.7985 per dollar on Tuesday, its weakest level since January 2016 and down from an intra-day level of 7.8004 on Monday. Under the linked exchange rate system, the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, is obliged to buy and sell US dollars to prevent the currency from breaching either side of a trading band between 7.75 and 7.85.

Markets are pricing in a 25 basis points increase in the US Fed Fund target rate to 1.25 per cent on Wednesday that would be the fourth rate rise since December 2015. The HKMA has increased its base rate three times since 2015, in lock step with the Fed to maintain the currency’s peg with the US dollar.

But Hong Kong’s dollar has weakened this year because commercial banks in the city have been keeping their prime rate at 5 per cent, reluctant to raise their bank rates. As the US dollar interest rate has climbed while the city’s bank rates remained low, the widening interest rate differential has led to selling of Hong Kong dollars.

The government has unveiled eight rounds of property tightening measures since 2014 but housing affordability remains one of the gravest issues facing the city.

Four major Hong Kong banks including Standard Chartered and HSBC raised their Hibor-linked mortgage rate in May but lenders still have little room to increase mortgage rates because of intense competition in the industry.

Consequently, the Hong Kong dollar is likely to remain under pressure, which may cause a clean break from the 7.80 level, according to Jasper Lo, chief strategist at King International Financial.