Hong Kong’s dollar weakens to three-decade low, testing city’s resolve to defend currency peg
The widest gap between local borrowing cost and US interest rate is drawing traders into the carry trade, where they sell Hong Kong dollars for the greenback, putting more pressure on the exchange rate
Hong Kong’s dollar weakened to its lowest level in more than three decades, as the gap between the city’s borrowing cost and US interest rates widened ahead of the US Federal Reserve’s March 21 meeting, drawing more dealers into the carry trade to sell the local currency for the greenback.
The Hong Kong dollar weakened for the third day on Monday, slipping to 7.8322 per US dollar, approaching the lower end of a 2005 trading band that could compel the Hong Kong Monetary Authority to support the currency.
Consequently, the premium of the US interbank rate, known as the Libor, over Hong Kong’s equivalent – known as the Hibor – is at the widest since 2008.
That has attracted more dealers into the carry trade, encouraging them to use the low Hibor to borrow and sell Hong Kong dollars to buy US dollars, which in turn pushes local currency’s value lower.
The local currency has not traded at such levels since its peg to the US dollar 35 years ago, transacting at 8.7 per dollar on September 26, 1983 just before the currency board system kicked in to peg the local currency at 7.8 per US dollar.