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Short-term interest rates in Asia will continue tumbling until the US dollar falls to a sustainable exchange rate against regional currencies, according to a senior HSBC executive.

'There must be dozens of examples where the weak dollar on one side results in a strong currency on the other,'  HSBC managing director and global head of fixed-income strategy Steven Major said yesterday. 'Of course, one of the reactions of the authorities is to pump in liquiddity, which pushes down rates.'

This cycle would probably continue until the dollar 'settles to a level that is more sustainable', he added.

In Hong Kong, short-term rates continued their sharp retreat yesterday under a weight of liquidity in the market as players switched out of the retreating greenback and into the Hong Kong  currency.

The benchmark three-month Hong Kong interbank offered rate (Hibor) fell almost 24 basis points  to 0.46955 per cent.

'Everyone knows the US dollar has been overvalued for most of the last five years, and most of the focus has been on the current-account deficits as the main reason,' Mr Major said.

'Finally, this fundamental pressure has prevailed and other short-term cyclical factors coming from higher interest rates and political events seem to have faded.'

Mr Major said investors in longer-dated bonds should prepare for a fall in prices and a rise in yields once the market priced in an inflation risk arising from  record high oil prices.

'I don't want to suggest we are about to see a big increase in inflation, but there should be more of a risk premium,' he said.

The present bond settings were effectively saying the increase in oil prices presented no inflationary risk, which was 'difficult to believe', Mr Major said.



Asian rates to tumble as dollar finds stability