04-07-2025
- Business
- South China Morning Post
HKMA defends Hong Kong currency as higher US rates threaten trading band
The Hong Kong Monetary Authority (HKMA) intervened twice in the foreign exchange market overnight as gaping interest-rate differentials encouraged carry trades and pressured the local currency to the weak side of its trading band.
The authority sold a total of US$3.775 billion during New York trading hours on Thursday, and bought the equivalent of HK$29.634 billion at HK$7.85 per dollar, it said in a statement on Friday. The moves would reduce the aggregate balance – a measure of the banking sector's liquidity – by the same amount to HK$114.541 billion on July 7, it added.
The local currency traded at HK$7.8488 after the market intervention. The HKMA had earlier sold US$2.55 billion on July 1 and US$1.2 billion on June 26 in New York to defend the currency peg.
Hong Kong pegged its currency to the US dollar in 1983 at HK$7.80 per dollar. In 2005, the HKMA introduced a narrow trading band, allowing its value to fluctuate between HK$7.75 and HK$7.85. Under the linked exchange rate system, the HKMA is obliged to intervene to preserve the trading band.
The depreciation pressure came from carry trades, in which investors borrow in a low-interest-rate currency to invest in assets denominated in a higher-yielding currency. The overnight interbank rate in Hong Kong stood at 0.02 per cent, versus 4.3 per cent in the US. Local three-month bills currently yield about 0.58 per cent, while similar US Treasury bills pay 4.35 per cent.
The gap is 'mouth-watering' for traders looking for profit from the rate differentials, according to Ryan Lam Chun-wang, head of Research for Hong Kong at Shanghai Commercial Bank.
