The Hong Kong dollar hit a fresh three-month lows against the US dollar on Tuesday, weighed down by a decline in the stock market and some arbitrage plays.
The domestic currency, allowed to trade between 7.75 and 7.85 to the US dollar, was trading at 7.7623/24, softening from Monday's close of 7.7613/14. It fell as low as 7.7627 at one point, the weakest since March 10. Asian stock markets plummeted on Tuesday following an overnight sell-off on Wall Street.
Hong Kong's benchmark Hang Seng index fell 2.48 percent to its lowest level since early January, while the China Enterprises index of H-shares dropped 4.25 percent. Investors were rattled by tough talk on inflation by Federal Reserve officials, bolstering expectations for global central bank interest rate rises that may slow global economic growth.
Some dealers attributed the sell-off in the local currency to interest rate arbitrage plays. "There was some carry trade arbitration on the back of softer short-term rates," one dealer said.
Another dealer at a local bank said the overnight interbank rate hit a low of 3.75 percent in the morning sessions with some major lenders lent out liquidity. However, the rate rebounded to 4.00/4.00 percent late on Tuesday, compared with 3.87/4.00 percent the previous day.