The authority purchases $390m as demand for greenbacks outstrips supply As the inflow of cash into Hong Kong slowed after three days of strong gains in the stock market, the Hong Kong dollar again fell back to the $7.80 peg rate late on Thursday, prompting the Hong Kong Monetary Authority to step in to protect its value. The HKMA bought HK$390 million at about 4am yesterday in order to provide the market with US$50 million as demand for US dollars outweighed supply in the thin overnight market, official data showed. It was the first time since August 4 that the HKMA had bought Hong Kong dollars. After falling marginally on Thursday, Hong Kong stocks edged higher yesterday, which helped the local dollar hold in a narrow range between HK$7.7998 and $7.80 to the US dollar, according to one dealer. Trading was active, however, with buyers and sellers evenly balanced, he said. The local dollar has been under selling pressure in recent weeks due to arbitrage trading to take advantage of higher US interest rates. However, a recovery in the stock market that saw the Hang Seng Index jump 3.36 per cent in the first three days of this week attracted a renewed injection of foreign funds, which offset some of those trades, currency dealers said. 'There has definitely been an inflow into Hong Kong, otherwise the HK$7.80 level should have been touched much earlier,' said Tommy Ong, a vice-president of treasury and markets at DBS Bank. One popular trade in recent weeks, Mr Ong said, had been to buy US dollars on a spot basis on Wednesdays and sell them on Thursdays. That gives the trader three days of higher US interest rates while the risk of an appreciation in the local dollar is minimised as you only depart with the local currency for one trading day. That is possible as spot transactions are settled two trading days after the transaction - the purchase of US dollars is settled on Friday, while the sale is settled the following Monday - interest is paid over the weekend as well. Such short-term arbitrage is expected to continue as long as the overnight Hong Kong interbank offered rate remains well below its US dollar counterpart, and given speculation that US interest rates will rise for a third time next month, it is a trade that is seen as virtually risk-free, dealers say. Hong Kong banks did not match the first two 0.25 percentage point rate rises by the US Federal Reserve in June and this month, which added to pressure on the local dollar. Purchases of the Hong Kong dollar by the HKMA, which under the currency board system is obliged to buy at HK$7.80 to protect the unit's value, have, however, reduced excess liquidity in the banking system to $7.23 billion. Once that liquidity, which is also known as the aggregate balance, returned to more normal levels, below HK$1 billion, the overnight rate should automatically move level with the greenback and eliminate the incentive for short-term arbitrage trading, Mr Ong said.