Hong Kong’s central banking authority took action in the currency market on Tuesday to defend the local dollar’s peg to the U.S. dollar. This move came after the Hong Kong dollar once again reached the strong end of its trading range, marking the fourth such incident in May.
The Hong Kong Monetary Authority (HKMA) purchased US$7.8 billion (HK$60.5 billion) on Tuesday in response to the Hong Kong dollar hitting 7.75—its strongest allowed level against the U.S. dollar. The HKMA has been intervening since May 2, each time the currency tested this upper limit.
The Hong Kong dollar is pegged within a narrow trading band of 7.75 to 7.85 against the U.S. dollar, a system designed to ensure financial stability in the city.
Regional currency gains fuel Hong Kong dollar strength
The recent strength of the Hong Kong dollar reflects broader trends in Asian currency markets. The Taiwan dollar, in particular, saw a dramatic surge, jumping 8% over just two trading sessions to hit its highest level in three years.
While analysts have struggled to pinpoint a single reason behind the currency movements, many believe that progress in trade talks between China and the United States may be boosting confidence in regional currencies. At the same time, concerns about the U.S. dollar’s long-term strength and growing skepticism around U.S. debt are encouraging investors to shift their money out of the dollar and back into local currencies.
This trend has led to the unwinding of “carry trades,” a strategy where investors borrow in low-yielding currencies to invest in higher-yielding assets. As these trades are reversed, demand for home currencies like the Hong Kong and Taiwan dollars increases.
Taiwan dollar surges amid trade speculation
The Taiwan dollar’s sharp rise followed the conclusion of U.S.-Taiwan trade discussions in Washington. Though there was no official word on currency-related agreements, the timing led to speculation about a possible informal deal to allow the U.S. dollar to weaken in exchange for trade benefits.
Taiwanese authorities, however, denied that currency matters were included in the talks.
HKMA action impacts Hong Kong’s banking system
The HKMA’s intervention has a direct effect on liquidity in Hong Kong’s financial system. By purchasing U.S. dollars, the central bank injects more Hong Kong dollars into the market. As a result, the city’s aggregate balance—a measure of liquidity in the banking sector—is set to rise sharply.
On May 7, the aggregate balance will increase to HK$161 billion. That’s nearly four times the level recorded on Tuesday, when it stood at HK$44.6 billion.
This rise in liquidity could influence short-term interest rates and broader monetary conditions in Hong Kong, which typically follow U.S. Federal Reserve policy due to the currency peg.
Related topics:
