Hong Kong has sold more forex reserves to sustain itself long peg for US dollarThis year took its total outlay to $5.48 billion.
The pressure on the Hong Kong currency is part of a wider turmoil in global forex markets. The US dollar has surged as investors adjust to a deteriorating economic outlook and prepare for aggressive action by the US Federal Reserve to bring decades of high inflation under control.
In recent days, the Japanese yen has touched its lowest level in 24 years against the dollar, while the WSJ dollar index, a broad measure of the strength of the US currency, has risen to its highest level since 2002.
The Hong Kong currency has been pegged to the US dollar since 1983 and trades within the permitted range of 7.75 to 7.85 Hong Kong dollars per US dollar. The city’s de facto central bank sells the US dollar if the local currency becomes too weak or the Hong Kong dollar becomes too strong.
On Tuesday and Wednesday, the city’s monetary authority sold US currency worth $3.24 billion in transactions in Hong Kong and New York hours, the three statements said.
The Hong Kong Monetary Authority’s dollar sales this year already exceeded its total from 2019, last year when it had to sell reserves to boost the local currency.
Measured in local-currency terms, the authority has sold over HK$43 billion this year, compared to HK$22.13 billion in 2019. It spent more than HK$103 billion during the period preceding the Hong Kong dollar’s weakness since April. As of August 2018.
“Hong Kong has abundant foreign exchange reserves,” Christopher Hui, the city’s secretary of financial services, said in a written reply to a question asked by a member of the city’s legislative council on Wednesday. He added that as of the end of May, Hong Kong has foreign exchange reserves of more than $460 billion, or about 1.7 times its monetary base.
The purchase of Hong Kong dollars by the HKMA would drain liquidity from the local financial system, helping to increase borrowing costs. Short-term interest rates in the city’s interbank lending market have lagged behind those of the US, making the Hong Kong dollar relatively less attractive.
The one-month Hong Kong Interbank Offering Rate, or Hibor, rose 0.14 per cent to 0.52% on Wednesday, its highest point since September 2020. The same one-month London Interbank offer rate for US-dollar lending was 1.32%. FactSet.
Analysts have said that the HKMA has tools to maintain the peg, which they believe is unlikely to be breached anytime soon.
“The pace of intervention has not exceeded the level we saw in 2018, when the US also hiked interest rates,” said Xu Wang, head of Greater China Foreign-Exchange and Rates Strategy at BNP Paribas.
Ms Wang said the removal of liquidity from the Hong Kong financial system is boosting Hibor, with rates still lagging behind US Libor, suggesting that the Hong Kong banking system is “very, very flush” with funds.
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