HKMA chief flags carry trade risk as rate gap widens
HKMA chief executive Eddie Yue warns a widening rate gap with the US could fuel carry trade, pushing the Hong Kong dollar toward the weak side of its band.
Hong Kong Monetary Authority chief executive Eddie Yue said on Thursday that a growing interest rate differential between Hong Kong and the United States could encourage carry trade, a dynamic that would push the Hong Kong dollar toward the weaker end of the band within which it is permitted to trade.
The local currency is pegged to the US dollar and moves in a tight range of 7.75 to 7.85 per dollar. When rates in the two markets diverge, traders can borrow in the lower-yielding currency and invest in the higher-yielding one, pressuring the Hong Kong dollar lower within that band.
Earlier on Thursday, the HKMA raised the base rate charged through its overnight discount window by 25 basis points to 4.25%. The move tracked a corresponding adjustment by the US Federal Reserve, reflecting the mechanics of the currency peg.
Yue's remarks point to the policy tension that can arise under the linked exchange rate system, where local borrowing costs must broadly follow US rates to keep the currency inside its prescribed range.