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The Hong Kong dollar weakened on Monday as interest-rate arbitrage and corporate demand for the US dollar offset moderate fund flows into the territory on lingering speculation of further yuan appreciation.
The domestic currency fell to as low as 7.7854 against the US dollar before trading back to 7.7849/50, off a morning high of 7.7830 and down from 7.7837/39 in late Asian trade on Friday.
"There has been a steady paying interest for the US dollar in the spot and forwards markets before lunch," said a dealer at a European bank, adding that the one-year forwards moved within a 20-pip range during the day. The discount on one-year Hong Kong dollar forwards was quoted at 880/860 pips in late afternoon trade, compared with 885/875 pips late on Friday.
The Hong Kong dollar is pegged at 7.80 to the US dollar but can trade between 7.75 and 7.85. Arbitrage traders were taking advantage of an interest rate differential between Hong Kong and the United States by selling Hong Kong dollars for US dollars.
Local interbank rates softened on Monday amid ample liquidity in the banking system. The volatile overnight rate was quoted at 3.60/3.70 percent in late afternoon trade, versus 3.80/3.85 percent at the open. The one-month rate fell two basis points to 3.80/3.85 percent from Friday's close.
The three-month rate softened to 3.87/3.92 percent from 3.88/3.93 percent late on Friday. The gap between the three-month US interbank rate and the Hong Kong rate was 146 basis points, widening from 142 basis points on Friday.
One trader at a local bank expected the Hong Kong dollar to stick to range trading between 7.7825 and 7.7855 in the near term. Hong Kong has been drawing fund flows on expectations that China's currency will appreciate. Some speculators have targeted Chinese firms listed in Hong Kong that would benefit from a stronger yuan.

Copyright Reuters, 2006

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