The Hong Kong dollar erased early gains to end marginally lower on Monday after corporate demand for the US currency and some arbitrage trades kicked in.
The domestic currency was trading at 7.8125/26 to the US dollar at 0944, retreating from a morning high of 7.8104, and softer than 7.8119/23 in late Asia trade on Friday.
The local currency was pushed higher earlier in the day, with some selling in the Hong Kong dollar forwards as sentiment lifted by a rally in domestic stocks, dealers said.
The Hong Kong dollar is pegged at 7.80 to the US dollar but can trade between 7.75 and 7.85. "A softer short-dated money rates and a rise in stocks, prompting some selling in the forwards market," said a dealer at a European bank.
The discount on one-year forwards widened to 670/655 pips from Friday's close of 650/640 pips.
Asian equity markets were mostly higher on Monday and traders said Beijing's rate hike at the weekend had been expected due to strong economic data.
Hong Kong's blue-chip Hang Seng Index gained 1.65 percent, while the China Enterprises index of H shares rose 1.23 percent.
China's central bank raised its benchmark one-year yuan lending and deposit rates by 0.27 percentage point each at the weekend to put a lid on credit and investment. Some dealers said the USD/HKD spot rate was likely to trade in a range between 7.8100 and 7.8150 in the near term.
Market focus will be shifting to the outcome of the Federal Reserve meeting later this week. The Fed will hold a policy-setting meeting on Tuesday and Wednesday, but no rate move is expected and investors are waiting to see what the US central bank will say about the state of the economy in its post-meeting statement.

Copyright Reuters, 2007

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