April 12, 2018 / 1:32 AM / 2 months ago

UPDATE 2-HK dollar at new 33-year low, hits weaker end of band; eyes on HKMA

* HKD falls to new low of 7.8500 per dollar

* HKD market is not in a crisis mode -analyst

* HKMA says may not need to enter market immediately

* Currency weakness not seen as speculative attack (Adds analyst comment, details)

By Donny Kwok

HONG KONG, April 12 (Reuters) - The Hong Kong dollar fell to a fresh 33-year low on Thursday, hitting the weakest end of the monetary authority’s targeted trading band amid persistent downside pressure as the interest rate gap between U.S. and Hong Kong dollars widened further.

The former British colony pegs its currency to the greenback, and so its money market rates mirror those of its U.S. counterparts. The gap between the two has widened as the U.S. Federal Reserve has continued to raise interest rates over the past two years, moving away from the emergency stimulus measures following the 2008 financial crisis.

Most market participants do not see this bout of weakness as a threat to the currency peg even though ample liquidity, thanks to inflows from Chinese investors and overseas into Hong Kong’s domestic markets, is anchoring short-term interest rates and exerting depreciation pressure on the currency.

“The HKD market is not in a crisis mode like in the period of global financial crisis or one-off sharp RMB depreciation,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

“With limited market uncertainty over HKD market, as long as HKD assets remain attractive to foreign investors ... there will be HKD buy-back for HKD assets.”

The Hong Kong Monetary Authority, 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.

The Hong Kong dollar fell to a new low of 7.8500 per dollar, the lower end of its trading band, during U.S. trading hours early on Thursday morning and again in Hong Kong trade.

“The HK dollar is expected to hover around the weak side of the band in the short to medium run, but breaching through the 7.85 level is unlikely,” said Alan Yip, FX market analyst at Bank of East Asia.

The currency peg, strong financial backing from the government and a sound economy would all provide support for the Hong Kong dollar, he added.

CURRENCY PEG

Traders and analysts have been expecting the HKMA to intervene by issuing additional bills to soak up the excess cash, although the authority has not yet done so despite the local currency hitting the 7.85 level.

An HKMA spokeswoman said that as long as banks were still willing to buy the Hong Kong dollar at the 7.85 level in the interbank market, the HKMA might not need to enter the market immediately to support the Hong Kong dollar.

“Even if the exchange rate weakens to the 7.85 level, it won’t necessarily trigger the HKMA’s weak-side convertibility undertaking,” she said in an email response to Reuters.

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.

Hong Kong authorities have unswervingly maintained the peg even though that meant reconciling sometimes divergent monetary policy-making pressures in the United States with the economic dynamics in mainland China.

The financial hub has more than $400 billion in reserves to defend the Hong Kong dollar.

Speaking in Hong Kong on Wednesday, International Monetary Fund (IMF) Managing Director Christine Lagarde said the fund believed the city’s pegging mechanism is consistent with the fundamentals of its economy.

The peg has forced the former British colony to import ultra-loose monetary policy from the U.S in recent years, with rock bottom interest rates in Hong Kong having helped to fuel soaring real estate prices.

The HKMA last 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.

Editing by Anne Marie Roantree and Shri Navaratnam

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