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Hong Kong Monetary Authority (HKMA)
Business

Hong Kong steps into market for the first time this year, selling US$538 million to prop up local dollar as funds flee to higher interest rates

  • HKMA buys HK$4.22 billion and sells equal amount of US dollars to bolster exchange rate, keep currency within trading band
  • Intervention follows a 25-basis points increase in the key US rate by the Federal Reserve earlier this month

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Last year, the HKMA ­intervened 41 times to buy HK$242.08 billion to keep the local dollar within its trading band. Photo: May Tse
Enoch Yiu

Hong Kong’s de facto central bank stepped into the foreign-exchange markets for the first time this year to protect the US dollar currency peg amid capital outflows after another rate increase by the Federal Reserve earlier this month.

The Hong Kong Monetary Authority (HKMA) bought HK$4.22 billion (US$538 million) on Monday in New York and sold the equivalent US currency to keep the value of the local currency within its trading band, after it weakened to HK$7.8500 per dollar this week. The band – in place since 2005 – allows the Hong Kong dollar to fluctuate between HK$7.7500 and HK$7.8500 against the US currency.

The Hong Kong dollar deteriorated because the interest rate gap between the United States and Hong Kong has widened to more than 200 basis points on February 14, from almost parity in November. The one-month Hong Kong interbank offered rate (Hibor) softened to 2.12 per cent on February 14 while the one-month US dollar London Interbank Offered Rate (Libor) stood at 4.58 per cent.

“The exchange rate did not rise suddenly, but started to rise slowly from December, which means that speculative activity is not widespread,” said Kirk Wong, a global market and foreign-exchange strategist at Everbright Securities International.

The HKMA’s intervention followed the 25-basis point interest rate increase by the US Fed on February 2 Hong Kong time. An interest-rate gap between the Hong Kong dollar and the US dollar attracts so-called carry trade by arbitrageurs, leading to capital outflows from the city and depreciation pressure on local currency.
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