Hong Kong’s de facto central bank has been forced to intervene to prop up the local currency for a second consecutive day after it slumped to HK$7.85 against the dollar.
The Hong Kong Monetary Authority said it had sold US$1.6bn and bought HK$12.2bn during New York trading hours, taking the aggregate balance below the HK$100bn threshold for the first time in a decade.
The Hong Kong dollar is pegged to the US dollar, trading within a band of HK$7.75 to HK$7.85 against the dollar. The HKMA is required to support the peg if the currency slips to either edge of the band and if other banks request it to intervene.
The move on Wednesday was the first time it took action since May, when it was forced to intervene over consecutive days to prop up the local currency.
Analysts said that the Hong Kong dollar’s weakness is the result of the widening gap between Hong interest rates and US interest rates. This differential allows traders to generate returns by borrowing in Hong Kong dollars and lending in US dollars.
The move by HKMA to buy Hong Kong dollars should remove liquidity and cause the interest rate gap to close.
The Hong Kong dollar was trading at HK$7.8491 on Thursday morning.
*This post has been amended to clarify the reference to reserves as the HKMA’s aggregate balance
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