The Hong Kong dollar is nearing its lowest level in a decade against its US counterpart as the interest rate gap between the two continued to widen in favour of the US.
The US dollar traded as high as HK$7.8218 on Monday, setting the Hong Kong currency on course for its weakest daily level in ten years. On an intraday basis, the dollar needs to climb above HK$7.8294 to surpass the level set in the China-inspired market turmoil of January 2016.
The Hong Kong currency’s weakness is the result of the excess liquidity in the territory’s banking system. While the Hong Kong Monetary Authority has tracked the US Federal Reserve in raising interest rates, high levels of cash mean local banks have not needed to follow suit.
On Monday, the gap between benchmark money market rates in the two reached its highest since the days following the collapse of Lehman Brothers in 2008. Three-month US dollar Libor was quoted at 1.31194 per cent while its equivalent in Hibor offered 0.75356 per cent.
While the HKMA is well able to defend the currency peg – in place since 1983 – if its HK$7.75 – HK$7.85 range is breached, investors and analysts are increasingly debatin whether the city’s monetary authority could act to tighten monetary conditions before that point is even reached, effectively raising interest rates in a potential blow to the territory’s economic growth.