Global Market: Hong Kong dollar hits one-month low as carry trades loom
The Hong Kong dollar weakened towards the lower end of its trading band as the widening interest-rate gap with the US increased the appeal of carry trades. The HKMA raised its base rate by 25 basis points to 4.25%, although analysts do not expect ...
By Anupam Nagar, ETMarkets.com |
Agencies
The Hong Kong dollar weakened towards the lower end of its trading band on Thursday as the widening interest-rate gap between Hong Kong and the United States raised the prospect of increased carry-trade activity, according to Reuters.
The Hong Kong dollar fell to 7.8456 per U.S. dollar in afternoon trading, its weakest level in a month. The currency is pegged to the U.S. dollar within a narrow 7.75-7.85 trading range and has been moving closer to the weak end of the band in recent weeks.
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The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, intervenes in the foreign exchange market when the currency reaches either side of the band to maintain the peg.
HKMA Chief Executive Eddie Yue said the interest-rate differential between the Hong Kong dollar and U.S. dollar was likely to widen, potentially encouraging carry trades and putting gradual downward pressure on the Hong Kong currency, Reuters reported.
Read more: US Market: Goldman Sachs sees Fed raising rates again in October
A global selloff in bonds and renewed inflation concerns have pushed U.S. Treasury yields higher and supported the U.S. dollar. Meanwhile, borrowing costs in Hong Kong have remained relatively subdued amid weak credit demand, increasing the appeal of trades that use Hong Kong dollars as a funding currency.
Despite the pressure on the Hong Kong dollar, DBS rates strategist Samuel Tse does not expect the HKMA to intervene, Reuters reported.
Tse expects the U.S. dollar could weaken amid fiscal concerns, while the Hong Kong dollar could receive support from higher local interest rates if they continue to move in tandem with Federal Reserve policy. He also pointed to Hong Kong's new five-year economic plan as a potential source of support for the currency and economy.
The HKMA on Thursday raised its base interest rate by 25 basis points to 4.25%, following the Federal Reserve's latest rate increase.
The Hong Kong dollar fell to 7.8456 per U.S. dollar in afternoon trading, its weakest level in a month. The currency is pegged to the U.S. dollar within a narrow 7.75-7.85 trading range and has been moving closer to the weak end of the band in recent weeks.
Read more: US Market: Fed's Warsh points to AI investment, geopolitical risks for higher yields
The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, intervenes in the foreign exchange market when the currency reaches either side of the band to maintain the peg.
HKMA Chief Executive Eddie Yue said the interest-rate differential between the Hong Kong dollar and U.S. dollar was likely to widen, potentially encouraging carry trades and putting gradual downward pressure on the Hong Kong currency, Reuters reported.
Read more: US Market: Goldman Sachs sees Fed raising rates again in October
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A global selloff in bonds and renewed inflation concerns have pushed U.S. Treasury yields higher and supported the U.S. dollar. Meanwhile, borrowing costs in Hong Kong have remained relatively subdued amid weak credit demand, increasing the appeal of trades that use Hong Kong dollars as a funding currency.
Despite the pressure on the Hong Kong dollar, DBS rates strategist Samuel Tse does not expect the HKMA to intervene, Reuters reported.
Tse expects the U.S. dollar could weaken amid fiscal concerns, while the Hong Kong dollar could receive support from higher local interest rates if they continue to move in tandem with Federal Reserve policy. He also pointed to Hong Kong's new five-year economic plan as a potential source of support for the currency and economy.
The HKMA on Thursday raised its base interest rate by 25 basis points to 4.25%, following the Federal Reserve's latest rate increase.
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