Hong Kong’s monetary authority stepped into the currency markets again on Thursday afternoon to support the local dollar, marking its second intervention in a single day to support the currency. The two interventions worth a total of HK$5.668 billion (US$722 million), the first such action in 18 months, came as rising US interest rates attract arbitrageurs, leading to capital outflows from the city. The de facto central bank bought HK$4.082 billion (US$520 million) on Thursday afternoon, after it bought HK$1.586 billion (US$202 million) in the morning to bolster the exchange rate and return it to its trading band, after it briefly weakened to HK$7.8500 per US dollar. The band, in place since 2005, allows the Hong Kong dollar to fluctuate between HK$7.7500 and HK$7.8500 per dollar． The interventions will reduce the aggregate balance – the sum of balances in clearing accounts maintained by banks with the monetary authority – to HK$331.923 billion on May 16, according to data provided by the Hong Kong Monetary Authority (HKMA). “The weakening of the Hong Kong dollar’s exchange rate was a result of the US interest rate rise, which has led to capital outflows from the city and other emerging markets,” Eddie Yue Wai-man, the HKMA’s CEO, said in a Legislative Council meeting on May 3, as he foreshadowed the impending intervention. The interest rate gap between the US and Hong Kong widened to 66 basis points on May 10, from 3 basis points a year ago, as the one-month Hong Kong interbank offered rate (Hibor) remained at 0.17 per cent while the one-month US dollar London Interbank Offered Rate (Libor) stood at 0.83 per cent. That has drawn currency arbitrageurs into the so-called carry trade , where they take advantage of the price differences to sell a low-yielding product (the Hong Kong dollar) to buy a high-yielding product (the US dollar). The selling of Hong Kong dollars drives the exchange rate to the weaker end of its trading band, forcing the HKMA to intervene. This is the main culprit behind the Hong Kong dollar’s slump The intervention is “nothing to worry about”, as Hong Kong has the backing of one of the world’s largest financial war chests through its HK$4.6 trillion Exchange Fund to defend the local currency, which has been pegged against the US dollar since 1983, Yue said. The HKMA steps into the currency markets to buy or sell the Hong Kong dollar to move the currency’s exchange rate within its trading band. Its most recent intervention came in October 2020, when it capped 85 interventions during the year, selling HK$383.5 billion of Hong Kong dollars to weaken the strengthening currency amid a flood of global capital that was chasing higher yields in Hong Kong amid low global interest rates. The tide has turned since then, after the US Federal Reserve ended its era of low interest rates to tamp down inflationary pressure in the American economy. The US monetary authority flagged 10 increases in interest rates through the end of 2023, which has forced the HKMA to raise its rate in lockstep to maintain the city’s currency peg. The HKMA’s most recent intervention at the weak end of the city currency’s trading band was in March 2019, when it spent HK$22.13 billion to buy a weakening Hong Kong dollar to bolster its exchange rate. The HKMA waited for the Hong Kong dollar to dip past the weaker end four times this week before intervening. “With funds flowing out of Hong Kong dollar system, the Hong Kong dollar interbank rates will face increasing pressure to rise, which will offset the incentives for carry trades and cause the Hong Kong dollar exchange rate to remain stable within the zone of 7.75 to 7.85,” a HKMA spokesman said after the intervention, adding that such activities were normal to maintain the peg. “The Hong Kong dollar market continues to operate in an orderly manner,” the spokesman added. The Hong Kong dollar will remain weak until the aggregate balance in the city’s banking system decreases to around HK$150 billion, according to former banker Tommy Ong, who is now the managing director of T.O. & Associates Consultancy. The HKMA will keep intervening in the market in the coming months as the carry trade is likely to continue in light of the US interest rate rises in the coming months, said Raymond Yeung, chief economist for the Greater China region at ANZ. “Such a trend will gradually push interest rates up, including mortgage rates in Hong Kong,” Yeung said. “This will have a negative impact on the city’s property market.”