The Hong Kong dollar and discounts on forwards moved in narrow ranges on Monday with thin activity ahead of a rate-setting meeting by the US Federal Reserve later this week.
"People are waiting for the FOMC decision on Tuesday and the post-meeting statement will be closely watched for the monetary policy outlook," one dealer said.
However, recent soft economic data in the United States have raised the probability that the Fed will slow the pace of interest rate hikes after the expected 25 basis points rise on September 21, dealers said.
Hong Kong interest rates tend to move in tandem with US rates because of the Hong Kong dollar's link to the greenback through a currency board system.
"Hong Kong will be justified in raising rates this time as short-term interbank rates have risen after a decline in the aggregate balance in recent months," another trader said.
"If local banks continue to refrain from raising rates, this could trigger more fund outflow from the territory as the spread between US and Hong Kong rates widens even further."
Hong Kong banks have not followed the Fed's last two moves because the banking system is awash with funds and amid weak loan growth in the territory.
The aggregate balance - the sum of balances on clearing accounts maintained by banks with the Hong Kong Monetary Authority - was steady at HK$3.424 billion on Monday compared with a peak of HK$54 billion at the end of April.
The local currency was trading between 7.7996 and 7.7999 per US dollar during the session, little changed from 7.7998/99 in late Asian trade on Friday.
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