The Hong Kong dollar drifted lower on Tuesday, weighed down by arbitrage buying of the US currency. The domestic currency was trading at 7.8072/73 to the US dollar, softer than 7.8052/54 in late Asian trade on Monday, after shuffling between 7.8050 and 7.8085.
"Interbank rates fell on expectations of an inflow of funds, with the overnight rate trading below or close to the 4 percent," said a dealer at a European bank, adding that softer interbank rates encouraged carry trades. Carry trades are where investors borrow low-yielding currencies to buy higher-yielding assets.
The gap between three-month Hong Kong interbank offered rates and the US rates widened to 83 basis points from 69 basis points on Monday. The Hong Kong dollar is pegged at 7.80 to the US dollar but can trade between 7.75 and 7.85. Another dealer at a local bank said interbank rates fell on Tuesday as some players lent out short-dated money and amid some selling in the Hong Kong dollar forwards. However, the interbank rates rebounded slightly in the afternoon but were still lower than the previous day's close.