Monetary authority poised to intervene as Hong Kong’s dollar weakens to its lower limit
Hong Kong’s currency weakened close to the lower limit of its trading band, as the city’s de facto central bank says it will step in when it hits 7.85 per US dollar
Hong Kong’s dollar has had its worst week in three months, deteriorating further against the US dollar after the city’s monetary authority (HKMA) cleared the way for the currency to weaken to the lower limit of a trading band before it intervenes in the market to prop it up.
The city’s currency strengthened slightly to 7.8376 per US dollar on Friday, but ended the week 0.1 per cent weaker against the greenback, having deteriorated for six consecutive days.
The local currency, pegged to the US dollar since 1983 at 7.8 per dollar, is supposed to move within a trading band of between 7.7500 and 7.8500. When it breaches the upper or lower limits of the band, the HKMA is mandated to either buy or sell the local currency to bring the exchange rate back into the band.
What’s weighing on the Hong Kong dollar is the carry trade, where investors sell low-yielding assets to invest in high-yielding ones. This has been helped by a 103-basis point difference between Hong Kong and US borrowing costs, the widest gap since 2008, which lures funds to flow from Hong Kong dollars into the greenback.