The Hong Kong dollar maintained a weak tone on Wednesday as some arbitrage traders chased higher-yielding currencies. The domestic currency had weakened as far as 7.8256 against the US dollar - the lowest since late September, 1985 - before recovering slightly to stand at 7.8248/50, down from 7.8230/32 in late Asia trade on Tuesday.
"The market is driven by carry trades," one trader said. Another dealer said the local currency declined due to the US dollar's strength in global markets, commercial demand for the US currency and profit taking in the local stock market.
The Hong Kong dollar has been under selling pressure as arbitrage traders took advantage of an interest rate differential with the United States and on talk of newly listed Chinese companies converting proceeds from Hong Kong IPOs.
The US dollar hit a three-month high against the yen and held near this week's six-week high versus the euro on Wednesday as expectations of US interest rate cuts diminished. Hong Kong's benchmark Hang Seng Index ended 0.22 percent lower on Wednesday. The Hong Kong dollar is pegged at 7.80 to the US dollar but can trade between 7.75 and 7.85. Interbank rates rebounded in the afternoon and the discount on Hong Kong dollar forwards narrowed as a result of a weaker local currency, dealers said.
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