HONG KONG: The Hong Kong dollar fell to a fresh 33-year low on Thursday, hitting the weakest end of the monetary authority's targeted trading band amid persistent downside pressure as the interest rate gap between US and Hong Kong dollars widened further.
The former British colony pegs its currency to the greenback, and so its money market rates mirror those of its US counterparts. The gap between the two has widened as the US Federal Reserve has continued to raise interest rates over the past two years, moving away from the emergency stimulus measures following the 2008 financial crisis.
Most market participants do not see this bout of weakness as a threat to the currency peg even though ample liquidity, thanks to inflows from Chinese investors and overseas into Hong Kong's domestic markets, is anchoring short-term interest rates and exerting depreciation pressure on the currency.
"The HKD market is not in a crisis mode like in the period of global financial crisis or one-off sharp RMB depreciation," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
"With limited market uncertainty over HKD market, as long as HKD assets remain attractive to foreign investors ... there will be HKD buy-back for HKD assets."
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.
The Hong Kong dollar fell to a new low of 7.8500 per dollar, the lower end of its trading band, during US trading hours early on Thursday morning and again in Hong Kong trade.
"The HK dollar is expected to hover around the weak side of the band in the short to medium run, but breaching through the 7.85 level is unlikely," said Alan Yip, FX market analyst at Bank of East Asia.
The currency peg, strong financial backing from the government and a sound economy would all provide support for the Hong Kong dollar, he added.
The HKMA on Thursday bought HK$816 million (US$103.95 million) of Hong Kong dollars from the currency market to intervene in the market.
According to the HKMA, the latest intervention will reduce the aggregate balance - the sum of balances on clearing accounts maintained by banks with the authority - to HK$178.96 billion on April 16, when the withdrawn funds will be settled.
The HKMA last intervened in the market in 2015, selling Hong Kong dollars as the local currency repeatedly hit the stronger end of its trading band.
Hong Kong authorities have unswervingly maintained the peg even though that meant reconciling sometimes divergent monetary policy-making pressures in the United States with the economic dynamics in mainland China.
Speaking in Hong Kong on Wednesday, International Monetary Fund (IMF) Managing Director Christine Lagarde said the fund believed the city's pegging mechanism is consistent with the fundamentals of its economy.
The peg has forced the former British colony to import ultra-loose monetary policy from the US in recent years, with rock-bottom interest rates in Hong Kong having helped to fuel soaring real estate prices.