Hong Kong Dollar Drops to Weak End of Its Fixed Trading Range

The Hong Kong dollar dropped to the weak end of its fixed trading range against the greenback, as cheap funding costs encouraged investors to borrow it and buy the US currency.

The city’s dollar weakened to trade briefly at 7.85 against its US equivalent on Friday, for the first time since 2023, according to traders familiar with the transactions who asked not to be identified because they weren’t authorized to speak publicly. It has tumbled over 1% from an early May high when it touched the strong end of its 7.75-to-7.85 permitted range against the US dollar.

In May, Hong Kong’s de-facto central bank injected a large amount of liquidity into the financial system to rein in what had become a rapid appreciation of the currency amid broad US dollar weakness. But that helped push borrowing costs lower and drove the spread between local interest rates and those in the US to a record.

When Hong Kong dollar’s funding costs are significantly lower than those in the greenback, traders tend to borrow the city’s currency and sell it against its higher-yielding US counterpart to earn the interest-rate difference.

The Hong Kong dollar’s slide in May was its biggest monthly slump since 1983 when it was pegged to the US peer.