Currency exchange store in Hong Kong. (Photographer: Xaume Olleros/Bloomberg)

Hong Kong Dollar Falls to Weakest Since 2007 as Rate Gap Widens

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(Bloomberg) -- Hong Kong’s currency fell to its weakest level since August 2007 as low lending costs in the city made it lucrative to borrow the currency to buy the U.S. dollar.

The exchange rate dropped to HK$7.8298 per dollar on Wednesday, approaching the weak end of its trading band. Interbank lending rates in Hong Kong are the lowest since 2008 versus those in America.

The slump is a test for the city’s de-facto central bank, which will be compelled to intervene should the currency weaken to 7.85 per U.S. dollar. While additional bill sales last year helped support the currency, the Hong Kong Monetary Authority said in December it had no plans to take such a move.

The current weakness is a far cry from January 2016, when outflows were testing the peg’s resilience. This time, 12-month forwards are near the strong end of the band. In the options market, the value of outstanding contracts with strike prices weaker than HK$7.85 has dropped to the lowest since at least November 2016, according to month-end figures.

©2018 Bloomberg L.P.

With assistance from Justina Lee, Tian Chen

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