The Hong Kong dollar recouped early losses on Monday afternoon, while interbank rates nudged firmer on demand for funds for upcoming initial public offerings. The domestic currency was trading at 7.7786/87 to the US dollar, recovering from a morning low of 7.7797 and firmer than Friday's local close of 7.7790/92.
Arbitrage traders took advantage of an interest rate differential between Hong Kong and the United States by selling Hong Kong dollars for US currency earlier in the day.
But the Hong Kong dollar recovered some ground in the afternoon as the US currency slipped against the yen and the euro in the European trade, dealers said.
"The retracement in the Hong Kong dollar was also caused by a tightening in short-dated money. A rise in interbank rates discouraged arbitrage trade," one trader said. Some players were locking in funds in preparation for a spate of IPOs in the coming months.
The one-month interbank rates rose to 4.05/4.10 percent from 4.01/4.05 percent late on Friday. The two-month rate firmed to 4.15/4.20 percent, versus Friday's close at 4.12/4.15 percent. Hong Kong dollar forwards moved in tandem with the interbank rates, dealers said.
The discount on three-month forwards narrowed to 230/225 pips from 235/230 pips late on Friday. However, some dealers said the wide interest rate gap between the United States and Hong Kong could continue to attract investors to US dollar, limiting the local currency's advance.
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