The Hong Kong dollar has dropped to its lowest level in 10 months, reaching 7.85 per US dollar, the weakest point of its pegged trading range. This depreciation has prompted the Hong Kong Monetary Authority (HKMA), the city's de-facto central bank, to intervene by withdrawing HK$9.42 billion ($1.2 billion) from the financial system. This marks the first time since May 2023 that the HKMA has had to step in to defend the lower bound of the peg, following earlier actions to inject liquidity when the Hong Kong dollar was strengthening.
The decline in the Hong Kong dollar is largely attributed to a significant increase in demand for the US dollar, fueled by expectations of higher interest rates in the United States. Federal Reserve Chairman Kevin Warsh's commitment to restoring price stability has spurred bets on interest rate hikes, making the US dollar more attractive. This has led to currency traders, including hedge funds, buying dollar call options, anticipating further gains for the greenback. JPMorgan Chase & Co., Bank of America Corp., and Goldman Sachs Group Inc. strategists have also expressed renewed confidence in the US dollar.
Contributing to the Hong Kong dollar's weakness is the appeal of carry trades, where investors borrow the cheaper Hong Kong dollar to invest in higher-yielding US dollar assets. This activity pushed the Hong Kong dollar towards the weak end of its 7.75-to-7.85 band. However, rising funding costs in Hong Kong, with the one-month Hong Kong Interbank Offered Rate (Hibor) reaching its highest level since January, are expected to dim the appeal of these carry trades. Analysts like Carie Li from DBS Bank predict Hibor could rise to a 3-4% range in the coming months, which might lead to an unwinding of some carry trades and ease pressure on the Hong Kong dollar by driving the US dollar down. Despite this, the immediate pressure on the peg remains, necessitating HKMA intervention to maintain stability.
