Hong Kong Peg Defense Hits $692 Million as Weakness Persists

© Bloomberg. Hong Kong one-hundred dollar banknotes are arranged for a photograph in Hong Kong, China, on Wednesday, June 13, 2012. Photographer: Jerome Favre/Bloomberg

(Bloomberg) — Hong Kong’s de facto central bank intervened to defend the local currency’s peg against the dollar for the second time in days.

The Hong Kong Monetary Authority bought HK$3.925 billion ($500 million) of local currency, according to its page on Bloomberg, after the Hong Kong dollar fell to the weak end of its HK$7.75-HK$7.85 trading band. It also purchased $192 million worth at the end of last week, it said Saturday. The move will reduce the aggregate balance, a measure of interbank liquidity, to $70.9 billion on March 14.

Continued intervention could see local borrowing costs rise at a faster pace if the aggregate balance falls below HK$20 billion, said Carie Li, an economist at OCBC Wing Hang Bank Ltd, noting that rates will remain low in the near term due to an increase in foreign capital flows and the city’s large money base.

Rising local borrowing costs, which have lagged U.S. rates despite the currency peg, would intensify pressure on home values in the world’s most expensive property market, and weigh on the city’s economy. The aggregate balance stood at about HK$180 billion just 11 months ago.

The Hong Kong dollar was 7.8498 per greenback as of 10:31 a.m. local time. The city’s one-month interbank borrowing costs, known as Hibor, have risen 8 basis points to 1.43 percent this week, the highest since Jan. 9, and up from a low of 0.91 percent last month. The equivalent U.S. Libor is at 2.50 percent.

Traders will continue to sell the Hong Kong dollar against the greenback, as the additional yield to be gained is attractive, said Binay Chandgothia, portfolio manager at Principal Global Investors (HK) Ltd. The currency has traded near the weak end of its band for weeks.

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HKMA Deputy Chief Executive Howard Lee on Saturday attributed the gap to abundant liquidity in the currency market, weak demand for loans and a lack of large-scale initial public offerings in Hong Kong.

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