Hong Kong sells more US dollars to defend currency peg

Hong Kong has sold more foreign exchange reserves to maintain its long-standing peg to the US dollar, bringing its total spending this year to $5.48 billion.

The pressure on Hong Kong’s currency is part of a larger turmoil in global currency markets. The US dollar has risen sharply as investors adjust to the deteriorating economic outlook and brace for aggressive action by the US Federal Reserve to bring decades of inflation back under control.

In recent days, the Japanese yen has hit its lowest level in 24 years against the dollar, while a broader gauge of the US currency’s strength, the WSJ Dollar Index, has risen to its highest level since 2002.

Hong Kong’s currency has been pegged to the US dollar since 1983 and trades within an allowable range of HK$7.75 to HK$7.85 per US dollar. The city’s de facto central bank sells US dollars when the local currency weakens or buys them when the Hong Kong dollar becomes too strong.

On Tuesday and Wednesday, the city’s monetary authority sold $3.24 billion worth of U.S. currency holdings in Hong Kong and New York hours transactions, it said in three statements.

The Hong Kong Monetary Authority’s dollar sales this year have already surpassed the total for 2019, the last year when it had to sell reserves to prop up the local currency.

Measured in local currency terms, the agency has sold more than HK$43 billion worth of U.S. dollars this year, up from HK$22.13 billion in 2019. During an earlier period of Hong Kong dollar weakness that lasted from April , it spent more than HK$103 billion as of August 2018.

“Hong Kong has ample foreign exchange reserves,” Christopher Hui, the city’s financial services secretary, said Wednesday in a written response to a question asked by a member of the city’s Legislative Council. He said Hong Kong had foreign exchange reserves worth more than $460 billion at the end of May, or about 1.7 times its monetary base.

The HKMA’s purchase of Hong Kong dollars will 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 those in the US, making the Hong Kong dollar relatively less attractive.

The one-month Hong Kong interbank offered rate, or Hibor, rose 0.14 percentage points to 0.52% on Wednesday, the highest since September 2020. The corresponding one-month London interbank offered rate for US dollar lending was 1, 32% fact set.

Analysts have said the HKMA has the tools to maintain the bond they believe will not be broken anytime soon.

“The pace of intervention has not exceeded 2018 levels” as the US also hiked interest rates, said Ju Wang, head of FX and rates strategy for Greater China at BNP Paribas.

While the withdrawal of liquidity from Hong Kong’s financial system is buoying Hibor, interest rates are still trailing US Libor, suggesting Hong Kong’s banking system is “very, very well stocked” with funds, Ms Wang said.

write to Dave Sebastian at dave.sebastian@wsj.com

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https://www.wsj.com/articles/hong-kong-sells-more-u-s-dollars-to-defend-currency-peg-11655289211?mod=rss_markets_main Hong Kong sells more US dollars to defend currency peg

Luke Plunkett

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