Hong Kong Monetary Authority flags carry-trade risks as currency weakens to 1-month low

By Reuters News

HONG KONG, Sept 17 (Reuters) - The Hong Kong Monetary Authority said on Thursday a widening interest-rate differential between Hong Kong and the United States could spur carry trades and push the Hong Kong dollar towards the weak side of its trading band.

The Hong Kong dollar fell to 7.8456 per US dollar in afternoon trade, its lowest level in a month. It is pegged to the greenback in a tight trading band of 7.75-7.85 and has been edging towards the weak end of that band in recent weeks.

The HKMA steps in when the Hong Kong dollar reaches either the weak or strong side of the trading band to maintain the peg.

"The HKD-USD interest rate differential will widen, and carry trade activities may cause the Hong Kong dollar to gradually ease," Eddie Yue, chief executive of the city's de-facto central bank, said in a statement on Thursday.

A recent global bond selloff and rising inflation risks have lifted Treasury yields and boosted the greenback. At the same time, Hong Kong borrowing costs have been subdued amid tepid credit demand, widening the rate gap that fuels carry trades funded with Hong Kong dollars.

Samuel Tse, rates strategist at DBS, said in a note that he did not expect the HKMA to intervene.

The US dollar could weaken due to fiscal concerns and the Hong Kong dollar is also likely to be supported by higher rates that move in lock step with Federal Reserve tightening as well the government's new five-year plan to help the economy.

The HKMA on Thursday raised its base interest rate charged via the overnight discount window by 25 basis points to 4.25%, tracking the Fed.

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