(Bloomberg) -- Hong Kong’s dollar tumbled to the weakest in almost two years against the greenback, before erasing losses, as the gap between local and U.S. interbank rates widened and investors discounted the possibility of the city’s monetary authority acting to support the currency.
The Hong Kong dollar slid to HK$7.8291 per dollar on Thursday, surpassing an intraday low set in August to reach the weakest level since January 2016. The currency was little changed at HK$7.8225 as of 4:46 p.m. It has declined 0.2 percent after the Hong Kong Monetary Authority indicated that it wasn’t planning to sell extra debt in response to the U.S. Federal Reserve’s interest-rate increase. In August, the HKMA’s announcement of an additional offering -- which drains liquidity from the city’s banking system -- helped to halt the currency’s march toward a 10-year low.
While funding costs in both the U.S. and Hong Kong currencies have risen in December, the differential is widening as the London interbank offered rate heads for its sharpest monthly increase in two years. Three-month Libor was 36 basis points higher than its Hong Kong equivalent as of Dec. 19, the widest spread since late November.
“The Hong Kong dollar’s decline is mainly due to the carry trade which sells Hong Kong dollar for the greenback, because short-term interest rates of the local currency -- overnight Hibor for example -- are still quite low," said Ngan Kim Man, deputy head of treasury at China Everbright Bank Co.’s Hong Kong branch. “Fundamentally, the Hong Kong dollar is also under selling pressure, because the Fed may raise interest rates again in the first quarter next year and the market is optimistic on dollar strength after the U.S. tax reform bill was passed."
HKMA Chief Executive Norman Chan said last week that it’s untrue that the HKMA aims to prevent the exchange rate of the local currency from reaching the weaker end of its band, and demand for additional debt had largely been met. Hong Kong’s dollar trades in a range from HK$7.75 to HK$7.85 per U.S. dollar.
The HKMA has issued two batches of additional Exchange Fund Bills since August. While the monetary authority said it was responding to demand from banks flush with cash, some analysts said the moves were aimed at narrowing the gap between local and U.S. interbank rates.
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