April 10, 2018 / 12:29 PM / a year ago

UPDATE 1-HK dollar hits fresh 33-year low, nears weaker end of band

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HONG KONG, April 10 (Reuters) - The Hong Kong dollar fell to a new 33-year low on Tuesday, inching closer to the lower end of the monetary authority’s targeted trading band, as the interest rate gap between the U.S. dollar and Hong Kong dollar widened further.

As the former British colony pegs its currency to the greenback, its money market rates mirror that of its U.S. counterparts.

The gap between the two has widened since the 2008 financial crisis, as the U.S. central bank has started raising interest rates.

Last month, following the U.S. interest rate hike, the Hong Kong Monetary Authority raised its base rate charged through its overnight discount window by 25 basis points (bps) to 2.00 percent, in lockstep with the U.S Federal Reserve.

However, the Hong Kong money market remains awash with liquidity due to equity market inflows and remnants of money printing from global central banks.

On Tuesday afternoon, the Hong Kong dollar fell to a fresh 33-year of 7.8496 per dollar.

The HKMA, the city’s de facto central bank, has pegged the local currency at 7.8 to the U.S. dollar since 1983. Since May 2005, it has been allowed to move between 7.75 and 7.85.

As the currency approaches the lower end of its trading band, the HKMA has said it would guarantee that the Hong Kong dollar will not weaken past 7.8500, and it will buy Hong Kong dollars and sell U.S. dollars.

The HKMA intervened in the currency markets in 2015, when the stronger side of the band at 7.75 was under threat as the Hong Kong dollar appreciated rapidly.

In early March, HKMA said it had no immediate plans to issue additional exchange fund bills to prevent the local currency from weakening further given the abundance of liquidity in the banking system.

It also said it was confident Hong Kong can deal with volatile asset markets and challenges arising from capital outflow. (Reporting by Donny Kwok and Twinnie Siu; Editing by Jacqueline Wong and Sherry Jacob-Phillips)

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