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HK dollar breaks HK$7.81 for 18-month low

The Hong Kong dollar commemorated the 20th anniversary of the territory’s return to China with… a new low, breaking through HK$7.81 against the dollar for the first time in 18 months.

Hong Kong’s currency has been weakening steadily this year since in spite of its strong dollar peg, local interest rates have failed to follow US ones higher.

The result is an interest rate gap between the two at its widest since the financial crisis of 2008, with one-month dollar Libor offering 1.224 per cent and its Hong Kong equivalent, just 0.467 per cent.

The yield pick-up is encouraging investors to use the Hong Kong dollar as the funding leg of a carry trade, say analysts, meaning they borrow in the currency, but swap the proceeds to invest in a higher-yielding one such as the US dollar.

Hong Kong’s peg has been in place since 1983 when it helped calm markets following tensions between the UK and China over how the city would be handed back to Beijing. The currency trades between HK$7.75 and HK$7.85 per dollar but in recent years, has tended to trade nearer the strong, HK$7.75 end, of the band.

On Monday it breached HK$7.81 for the first time since January 2016 when global market turmoil, initially triggered by worries about China, sent it spiking briefly. Over the past 20 years, it has only traded over HK$7.80 on a handful of occasions, and never for long.