Hong Kong's dollar tumbled to the weakest in almost two years against the greenback, before erasing losses, as the gap between local and US interbank rates widened and investors discounted the possibility of the city's monetary authority acting to support the currency.
The Hong Kong dollar slid to HK$7.8291 per dollar on Thursday, surpassing an intraday low set in August to reach the weakest level since January 2016. The currency was little changed at HK$7.8225 as of 4:46 p.m. It has declined 0.2 per cent after the Hong Kong Monetary Authority indicated that it wasn't planning to sell extra debt in response to the US Federal Reserve's interest-rate increase.
In August, the HKMA's announcement of an additional offering —which drains liquidity from the city's banking system — helped to halt the currency's march toward a 10-year low. While funding costs in both the US and Hong Kong currencies have risen in December, the differential is widening as the London interbank offered rate heads for its sharpest monthly increase in two years.
Three-month Libor was 36 basis points higher than its Hong Kong equivalent as of Dec. 19, the widest spread since late November.
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