THE Hong Kong dollar was sold off yesterday amid rumours about Deng Xiaoping's health and the first meeting of the Group of Seven (G7) in Washington. The annual spring meeting of the G7 was due to get under way amid stiffening international lobbying for it to bolster the US dollar which has lost 17 per cent against the yen this year. Foreign exchange dealers said the US dollar might temporarily regain safe haven status if rumours of the impending death of the Chinese patriarch turned out to be accurate, as they were undermining the Hong Kong dollar. The Hong Kong dollar, pegged to the US dollar at the rate of HK$7.80 to US$1, has always traded on the strong side of the peg. It came under slight pressure yesterday in the first noticeable bout of selling since it withstood the speculative attack in mid-January after the Mexican peso crisis. It opened at about $7.7340-50 to the US dollar and pushed up to $7.7405 in the early afternoon before edging back to $7.7365-75 late yesterday. A foreign exchange dealer with a major local bank said the Hong Kong dollar retreated from about $7.732 to $7.736 during the day, although volumes were not substantial. 'You can see there's been some sharp weakening,' the dealer said. 'First there was news that Deng's children had cancelled their overseas engagements. 'That caused a bit of panic buying of US dollars and selling of Hong Kong dollars. 'It's not a massive move - just 40 to 50 points - in terms of a normal currency, but in the context of the Hong Kong dollar, it's quite a big day.' Rumours that Beijing mayor Chen Xitong had resigned did not help confidence either, he said. Standard Chartered Bank treasurer Stanley Wong said Chinese financial institutions were behind the selling spree. Once the $7.7405 level was reached, firm buying positions entered the market, propping up the Hong Kong currency. He argued that even when the actual news of Mr Deng's death came, the Hong Kong dollar would not weaken further than $7.75. Despite an obvious weakening, HSBC domestic markets manager Andrew Fung said there were no signs of speculation. Trading on forward contracts was thin and inquiries were few. Speculators usually covered their positions by buying forward contracts on the currency. 'It is just a temporary imbalance between supply and demand of Hong Kong dollars,' Mr Fung said. 'The transactions were mainly commercial, not speculative.' One banker said the market was pricing Mr Deng's death into the value of bonds, with five-year notes losing significant ground, and five-year swap rates rising about 15 basis points (0.15 percentage points). He said the market had been waiting for an opportunity to sell longer bonds after a period of stability and would probably wait for an indication that the G7 was committed to the US dollar before buying again. Turnover was high in Exchange Fund bills and notes, recording a total of $22.4 billion, compared to $9 billion on Monday. Yields on short-dated government papers only moved up slightly, by about five basis points.