The Hong Kong dollar (HKD) has been trading within a range of 7.7818 to 7.8387 against the US dollar (USD) during the early part of 2026. The HKD initially eased as interbank rates (HIBORs) softened due to fading year-end funding demand, encouraging carry trade activities where investors borrow cheap HKD to buy higher-yielding USD assets. However, uncertainty from the Middle East conflict in early March led investors to unwind short HKD positions, strengthening the currency. Despite this, carry trade incentives pushed the HKD weaker again, with thin liquidity exacerbating spot price movements. Towards the end of the quarter, short-dated interest rates firmed, leading to a slight rebound due to unwinding of short positions.
Seasonal cash demand, including listed firms' mid-year dividend payouts and banks' need to meet regulatory metrics, is expected to lift funding costs for the HKD, potentially dampening the appeal of carry trades. Carie Li, a strategist at DBS Bank in Hong Kong, noted that a rising HIBOR narrows the interest rate gap between the USD and HKD, which could prompt investors to unwind existing carry trades and ease short-term currency pressure. The one-month HIBOR, which stood at about 2.68% on June 10, is projected to rise to a 3-4% range in the coming months.
The Hong Kong Monetary Authority (HKMA) has taken measures to manage currency fluctuations. In June 2025, the HKMA withdrew HK$9.42 billion ($1.2 billion) from circulation when the exchange rate touched the weak end of its peg, marking its first intervention since May 2023. Prior to this, the HKMA had injected liquidity to curb gains in the HKD as the US currency declined. In February 2026, Hong Kong also announced plans to withdraw HK$150 billion ($19 billion) from the Exchange Fund, which serves as a defense fund for the currency peg, to help finance a technology hub. Despite these developments, the HKMA reported that the HKD exchange and interbank markets continued to trade in a smooth and orderly manner in early 2026, with no abnormality noted in the usage of the Discount Window and a stable Aggregate Balance of around HK$54 billion.
