The Hong Kong dollar showed further strength yesterday morning as the sharp retreat several days earlier attracted speculative buying of the local currency. Continued gains in the Hang Seng Index to a near 17-month high amid heavy trading worth more than $18 billion was underpinning the advance. Late in the session, the Hong Kong dollar slipped back as punters took the opportunity to square positions ahead of a long weekend in the United States and Japan. This left the local currency 0.38 per cent down on the week but still 0.83 per cent stronger than the HK$7.80 level at which it is linked to the US dollar. A report by the US Treasury Department on Asia's currency policies to Congress next week and the October 20-21 summit of the Asia-Pacific Economic Co-operation Forum, which was expected to raise the issue of a weak dollar policy, were keeping upward pressure on Asian currencies, dealers said. 'It's unavoidable that these events will result in more speculation about an appreciation of the Chinese yuan,' one dealer said, noting that this is also maintaining a certain upward pressure on the Hong Kong dollar. The local currency may have calmed down a bit in the past couple of sessions, but dealers said the jury was still out on whether there would be another wave of US dollar selling in the short term. They noted that the sharp fluctuations in recent weeks had sparked more hedging activity than usual with regard to the Hong Kong dollar. The implied volatility on the Hong Kong dollar had shot up to more than 2 per cent from about 0.2-0.3 per cent just before the Group of Seven meeting in Dubai last month, which triggered the start of the US dollar decline, said Tommy Ong, vice-president of treasury and markets at DBS Bank. 'This means people nowadays should be more concerned about the exchange rate compared with a couple of weeks ago,' he said. The increased hedging activity also stems from the fact that the Hong Kong Monetary Authority (HKMA) had been quite relaxed about the rapid strengthening of the Hong Kong dollar and had left the market guessing at how high it was prepared to let it drift. Over the past week, a general belief has started to form that a line was drawn with the HKMA's most recent intervention in support for the US dollar at just below HK$7.71. 'The HKMA should support [the Hong Kong dollar] at HK$7.70 and we think it will go back to HK$7.80 eventually. We just have to wait and see how long it takes,' said Pieter Van Der Schaft, regional chief economist with Barclays Capital. He said the low short-term interest rates should make people more keen to buy US dollars.