A Hong Kong Dollar Drop to Weak End of Band May be Short-Lived

(Bloomberg) — The Hong Kong dollar is expected to spend a shorter amount of time under pressure than recent bouts of weakness, thanks to forecasts for a softer greenback and seasonal factors.

The city’s currency is slipping ever closer to the weak end of its fixed trading range, as low borrowing costs encourage carry trades where investors borrow it to buy the US dollar and pocket the near-record interest-rate difference. 

A breach of the 7.85 per greenback threshold would prompt the Hong Kong Monetary Authority to sell US dollars to protect its currency peg. However, a sustained intervention may not be required as the impact of President Donald Trump’s trade and fiscal policies weigh on the greenback.

Equity inflows from mainland China and seasonal demand for Hong Kong dollars for corporate dividend payments will also buoy the currency and reduce the pressure on authorities to act, according to Carie Li, global market strategist at DBS Bank Ltd.

“The US dollar is weaker and the Federal Reserve is on the way to cut rates, this time the carry trade will not be so active,” Li said. “The Hong Kong dollar may not stay at 7.85 for as long as it did in 2022-2023.”

The Hong Kong dollar hovered around the weak end of its 7.75-7.85 band for a period of about seven months from May 2022, touching the edge in several trading sessions. The following year it did the same from February to May as US rate hikes widened the US-Hong Kong yield gap and made it similarly appealing to buy the greenback.

The trigger for the recent bout of weakness in the city’s currency was ironically its strength amid an exodus from US assets, which forced the HKMA to sell an unprecedented amount of Hong Kong dollars last month. But the flood of liquidity also dragged down borrowing costs, pushing the currency from one end of the band to the other at the fastest pace in four decades.

The local dollar may soon touch the edge of the range but expectations for US currency weakness will keep it volatile, according to Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence.

“Carry trades will eventually lift the Hong Kong dollar to 7.85 likely before the end of June,” he said. “The new norm will be for the Hong Kong dollar to swing more frequently within 7.75 to 7.85 trading range.”

Wall Street banks are reinforcing their calls that the US currency will weaken further, thanks to a combination of interest-rate cuts, slowing economic growth and Trump’s trade and tax policies. A Bloomberg gauge of the greenback is trading around its weakest since 2023.

The scale of the HKMA’s intervention and its reluctance to mop up the excess cash it pumped into the market, suggests to some its priority is to help revive the city’s economy by keeping borrowing costs low. If it wanted to push back on the bearish bets against the local dollar it could push borrowing costs higher again by issuing bills.

“If Hong Kong Interbank Offered Rates stay low for longer and banks are able to pass the lower funding cost to the real economy, it can help the Hong Kong economy by stimulating demand and financing activities,” said Gary Ng, senior economist at Natixis in Hong Kong. “For now, the HKMA seems happy with low interest rates.”

–With assistance from Masaki Kondo.

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