Hong Kong dollar succumbs to arbitrage trade

20 Jul, 2006

The Hong Kong dollar fell against the US dollar on Wednesday as arbitrage traders exchanged the local currency for US dollars, taking advantage of an interest rate differential between the two countries.
Interbank rates generally fell on the view that market liquidity would remain abundant. However trade was quiet as traders awaited US inflation data and testimony by US Federal Reserve Chairman Ben Bernanke later on Wednesday for clues on the direction of US interest rates.
The Hong Kong dollar was trading at 7.7757/59 to the US dollar in late trade, down from 7.7740/41 late on Tuesday. Under Hong Kong's fixed-exchange rate link, the Hong Kong dollar can trade between 7.75 and 7.85 to the US dollar.
The one-year interbank rate was quoted at 4.89/4.95 percent by late trade, down from 4.93/5.00 percent late on Tuesday; the discount on one-year Hong Kong dollar forwards was quoted at 575/565 pips, compared with 552/532 pips on Tuesday.

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