In Hong Kong, the three banks tasked with issuing the currency can only do so when they have the equivalent exchange in US dollars on deposit, due to the linking of the two currencies. SCMP pix
HONG KONG: The Hong Kong dollar fell to a new 33-year low on Wednesday, inching closer to the lower end of the monetary authority’s targeted trading band, as the interest rate gap between US dollar and Hong Kong dollar widened further.
As the former British colony pegs its currency to the greenback, its money market rates mirror that of its US counterparts.
The gap between the two has widened since the 2008 financial crisis, as the U.S. central bank has started raising interest rates.
However, the Hong Kong money market remains awash with liquidity thanks to equity market inflows and remnants of money printing from global central banks.
On Wednesday, the Hong Kong dollar fell to a new 33-year low of 7.8498 per dollar.
The Hong Kong Monetary Authority, the city’s de facto central bank, has pegged the local currency at 7.8 to the US dollar since 1983. Since May 2005, it has been allowed to move between 7.75 and 7.85.
As the currency approaches the lower end of its trading band, the HKMA has said it would guarantee that the Hong Kong dollar will not weaken past 7.8500, and it will buy Hong Kong dollars and sell U.S. dollars.
The HKMA intervened in the currency markets in 2015, when the stronger side of the band at 7.75 was under threat as the Hong Kong dollar appreciated rapidly. - Reuters
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