Hong Kong Intervenes to Defend Dollar for First Time Since 2019

Hong Kong Intervenes to Defend Dollar for First Time Since 2019

Hong Kong intervened to defend its currency for the first time since 2019, putting further upward pressure on interest rates in an economy already reeling from strict pandemic border controls and a shaky property market. 

Capital outflows fueled by rising interest rates in the US sent the Hong Kong dollar to the weak end of its 7.75-to-7.85 per greenback trading range late Wednesday. The Hong Kong Monetary Authority bought about HK$1.59 billion to prop up the currency, which was still trading at the weak end as of 8:36 a.m. local time on Thursday.

Further intervention will drain liquidity from Hong Kong’s financial system, driving up borrowing costs at a time when the local economy is contracting under the weight of some of the world’s strictest Covid-containment measures. Rising interest rates also pose a threat to Hong Kong’s property market, with Goldman Sachs Group Inc. saying earlier this year that home prices in the world’s least affordable market may slump 20% by 2025.

The move comes as central banks from act to defend currencies buffeted by expectations of aggressive Federal Reserve rate hikes. While some commentators have called on Hong Kong to abandon its dollar peg, there’s little sign that authorities plan to change a system that has survived multiple speculative attacks since 1983 and helped turn the city into one of the world’s most important financial centers.

Selling of the local dollar has intensified in recent months as a hawkish Fed boosted the US currency, while pandemic restrictions in the former British colony have damped its growth outlook. The testing of the band’s limit on Wednesday came around the same time as faster-than-expected US inflation data sent the greenback briefly up and Treasury yields surging. While gauges of the US dollar and longer-maturity Treasury yields subsequently retreated, Hong Kong’s currency continues to hover right near the band’s edge.

The Hong Kong dollar has weakened about 0.7% this year, with some of the declines coming as Fed rate hikes widened the funding rate gap between the US and the special administrative region, prompting traders to borrow the currency in the interbank market and sell it versus the higher-yielding greenback. The premium of the three-month US interbank rate, known as Libor, over Hong Kong’s equivalent, Hibor, expanded to the widest since 2019 in April.

The Hong Kong dollar will remain under pressure as US yields climb on rate-hike bets, said Samuel Tse, an economist at DBS Bank Ltd. in Hong Kong.

Move is HKMA’s first purchase of currency in market since 2019

Currency allowed to trade between 7.75 to 7.85 per greenback