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Hong Kong central bank steps in to support weakening currency

Marks first such intervention in 18 months

The Hong Kong dollar has been softening as U.S. interest rates rise while a surfeit of cash in the local banking system keeps Hong Kong rates pinned down.   © Reuters

HONG KONG (Reuters) -- The Hong Kong Monetary Authority (HKMA) stepped into currency markets for the first time in 18 months, twice buying Hong Kong dollars to stop the local currency weakening and breaking its peg to the U.S. dollar.

The de facto central bank bought HK$1.586 billion ($202 million) from the market in U.S trading on Wednesday and a further HK$4.082 billion in Hong Kong trading on Thursday.

The Hong Kong dollar is pegged to a tight band of between 7.75 and 7.85 versus the U.S. dollar. It has been softening as U.S. interest rates rise while a surfeit of cash in the local banking system keeps Hong Kong rates pinned down.

One-month U.S. dollar Libor, a benchmark lending rate, is around 0.8% - its highest since April 2020 - while the Hong Kong equivalent, one-month Hibor, is under 0.2% and barely above its COVID-19 pandemic lows.

HKMA's Chief Executive Eddie Yue said last week that as it intervenes and funds flow out of Hong Kong's system, local rates should rise, removing the incentive for market players to conduct "carry trades", and hence keep the Hong Kong dollar trading within its band.

"All these are normal operations in accordance with the design of the Linked Exchange Rate System," he said.

This arrangement was created in 1983 and has survived many crises over the years, including an attack from famed short-seller George Soros during the 1997-98 Asian financial crisis.

The HKMA last intervened in October 2020. That year it sold HK$383.5 billion worth to rein in the strengthening currency, according to HKMA data, while it last intervened at the weak end of the band in March 2019.

After both interventions, the aggregate balance aHKSETBAL - the key gauge of cash in the banking system - will decrease to HK$331.923 billion on May 16, an HKMA spokeswoman said on Thursday.

It dropped to around HK$50 billion in 2019 after the last series of HKMA interventions to stop the currency weakening.

In 2020, it surged to more than HK$450 billion as capital rushed into Hong Kong, drawn by higher interest rates locally than in the U.S. and a series of large initial public offerings.

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