HKMA Spends HK$1.5 Billion To Defend Peg

The Hong Kong Monetary Authority has spent HK$1.51 billion of foreign currency reserves to prop up the Hong Kong dollar after it hit the bottom end of its trading band with the US dollar.

The city's de facto central bank made its first major currency market intervention since August as the local currency's peg to its US counterpart came under pressure, falling below its minimum level on Friday.

The moves is expected to push local banks to increase interest rates, forcing up borrowing costs.

Howard Lee, the HKMA's deputy director, said the currency's weakness reflected "abundant liquidity in the HKD market, weak demand for loans and a lack of large scale Initial Public Offerings (IPOs), coupled with the Fed raising the interest rates in September and December last year by a total of 50 basis points".

That left local interest rates lagging behind those of the United States, a situation investors can exploit by swapping Hong Kong dollars for US dollars in the so-called "carry trade".

Under the city's currency peg system, the HKMA sells foreign currency and buys Hong Kong dollars whenever the rate reaches HK$7.85 to US$1. It buys foreign currency and sells Hong Kong dollars when the currency reaches HK$7.75 to the greenback.

The HKMA made multiple Hong Kong dollar purchases last year to stem large outflows of cash as investors took advantage of the carry trade.