Hong Kong dollar retreats

The Hong Kong dollar fell on Friday, erasing the previous session's gains, as the market re-assessed the Federal Reserve's stance on interest rates. The currency slipped as low as 7.8129 against the US dollar before trading back to 7.8117/19, down from 7.8089/90 in late Asia trade on Thursday.
Some dealers attributed the decline to short-covering positions in the US dollar. "There were some dollar buying, partly due to the US currency's strength on the global market," said a trader at a European bank. "Since (local) short-term interbank rates are low, people favour being long US dollar in arbitrage trades."
The Hong Kong dollar is pegged at 7.80 to the US dollar but can trade between 7.75 and 7.85. The Federal Reserve left interest rates unchanged at 5.25 percent on Wednesday and said it remained uneasy about inflation, but dropped an explicit reference to the possibility of taking rates higher.
Investors initially took the shift in the policy statement as a sign that a rate cut may be near, pushing the US dollar to a two-year low against the euro. However, the greenback staged a rebound in New York trade on Thursday and steadied against the euro and yen in Asia trade on Friday on the view that the Fed may keep interest rates on hold for some time.
Some dealers expected the USD/HKD spot rate to consolidate in a range between 7.8080 and 7.8130 in the near term. In the interbank market, the yield curve steepened slightly as the front-end rates were a tad softer amid abundant liquidity. But the longer-dated rates nudged higher, taking their cue from a rise in US bond yields overnight on doubts whether a softening of the Fed's tone on inflation would produce a rate cut soon.
The overnight interbank rate was quoted at 3.65/3.70 percent, while the one-week rate softened to 3.78/3.83 percent from 3.80/3.85 percent late on Thursday. The one-year rate rebounded to 4.20/4.25 percent from the previous day's close of 4.17/4.20 percent.
The Hong Kong dollar was trapped in narrow ranges with some selling interest in the long end in late afternoon. "There is no clear direction in the market. The one-year forwards moved within a 20-tick range," one dealer said. The discount on one-year forwards was quoted at 740/730 pips, versus Thursday's close of 735/-725 pips.