The Hong Kong dollar extended its losses on Thursday, with a fall in local interbank rates prompting market players to chase higher-yielding assets. The domestic currency was trading at 7.8131/35 against the US dollar, weaker than 7.8100/02 in late Wednesday trade in Asia.
"We've heard some Chinese banks buying US dollars, possibly related to arbitrage trades," said a senior dealer at a local bank. "Given softer interbank rates, the USD/HKD spot rate could head towards 7.82 in the near term." Arbitrage traders were taking advantage of an interest rate differential with the United States by selling Hong Kong dollars for the US currency.
The gap between three-month Hong Kong interbank offered rates and the US rates widened to 90 basis points from 81 basis points on Wednesday. The local currency is pegged at 7.80 to the US dollar but can trade between 7.75 and 7.85. Interbank rates were generally lower amid ample liquidity in the market. One trader attributed the decline in interbank rates to local and Chinese banks offering to lend short-dated liquidity, and subscription money returning to the banking sector after the popular Walker Group debut.
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