HKMA weakens HK$ yet again

Sells US$500 million to defend peg to US dollar.

The Hong Kong Monetary Authority again intervened in the currency market yesterday, selling HK$3.88 billion (US$500 million) in Hong Kong dollars as the local currency repeatedly hit the strong end of its authorized trading range.

HKMA said it intervened to weaken the HK$, preventing it from strengthening past its trading peg with the US dollar. It sold HK$3.1 billion in the forex markets after the US dollar hit HK$7.75, the lower end of the trading band between the local unit and the greenback.

HKMA is obliged to act by buying or selling the HK$ whenever it touches either side of the HK$7.75 to HK$7.85 trading band against the US dollar, to which it has been pegged for 29 years.

The latest move increased Hong Kong’s aggregate balance, a measure of the city's interbank liquidity, to HK$183.95 billion.

The HKMA has made multiple interventions since mid-October due to the strengthening of the Hong Kong dollar as a result of the U.S. Federal Reserve launching a third round of quantitative easing

The interventions began October 21 when HKMA sold $603 million worth of Hong Kong dollars in the foreign exchange market. HKMA took action when the U.S. dollar hit HK$7.75, the lower limit of the trading band in which the U.S. dollar is allowed to trade against the local currency.

Hong Kong allows its dollar to trade in a narrow range between HK$7.75 and HK$7.85. When it reaches the strong end of the permitted trading range, HKMA offers to buy U.S. dollars to prevent further appreciation.

This linked exchange rate, which continues to receive much criticism, was adopted in 1983 when negotiations between China and the U.K. over the city’s shift to Chinese control cause massive capital outflows.