Hong Kong steps in to protect dollar peg amid market pressure

The Hong Kong Monetary Authority (HKMA) has jumped into the foreign exchange market again after the Hong Kong dollar dropped past HK$7.85 per US dollar, which is the weakest point allowed under the city’s peg system.

This intervention puts pressure on what’s been one of the most profitable carry trades globally. Traders have been borrowing cheap Hong Kong dollars, flipping them into US dollars, and pocketing the difference. That trade just got harder.

To stop the drop, the HKMA sold HK$9.4 billion, about $1.2 billion, from its reserves to buy back local currency. This tightens up the cash flowing in the banking system and pushes up interbank lending rates. Since early May, those rates had been scraping near zero. That cheap money fueled carry trades, but now it’s about to get expensive.

HKMA pushes back after second straight month of currency pressure

This is not the first time they’ve stepped in. The last intervention happened just last month, when the Hong Kong dollar got too strong. Back then, the HKMA had to do the opposite—dump local currency onto the market. That pumped liquidity into the system, sending lending rates even lower. The result? A cheaper Hong Kong dollar, an even wider rate gap with the US, and a golden month for traders. 

But now, the HKMA is reversing that. They’re pulling liquidity out to lift borrowing costs and make shorting the Hong Kong dollar painful. This will lower the city’s aggregate balance, basically a cash measure banks watch like hawks, to HK$164 billion, according to the authority. That balance had swelled when they last intervened. Now it’s getting cut down.

The last time the HKMA had to prop up the local currency this way was May 2023, and it’s no coincidence. The US dollar has been weaker lately, putting unwanted pressure on the peg. The carry trade, driven by the rate gap, made Hong Kong’s currency too appealing to bet against. The gap between one-month US and Hong Kong interest rates hit 3.4% this week, making the trade extremely juicy for global players.

Volatility triggers talk, but peg remains firm

This sudden back-and-forth has made people nervous about the peg’s future. The Hong Kong dollar’s drop in May 2025 was the steepest since the peg began in 1983, and that’s got some wondering how much longer this system will hold. But there’s no sign of it breaking anytime soon.

The currency recovered slightly after the latest action, moving up to HK$7.8492 per US dollar during Thursday morning trading in Asia. The HKMA wants to keep it in the HK$7.75-HK$7.85 band. It’s a rigid system, but one that’s worked for decades—until volatility kicked in hard this year.

Back in May, the HKMA had injected a large amount of cash into the financial system when the Hong Kong dollar appreciated too fast. That helped cool things down, but also sent lending costs plunging. Traders used the moment to borrow low and convert to US dollars, feeding the carry trade even more. That’s what made the current reversal necessary.

Chief Executive John Lee Ka-chiu said earlier this month that the peg isn’t going anywhere. Speaking to local media in early June, John made it clear: “Hong Kong will maintain its currency’s peg to the US dollar as it is a key success factor.” His comments were aimed at calming speculation around alternative systems. But with markets pushing the currency to both ends of its band in just two months, staying the course might require more firepower, and more interventions like this.

Still, the city’s got muscle. As of May, Hong Kong holds $431 billion in foreign currency reserves. That’s enough to keep defending the peg, even if the carry trade keeps pulling in big money from abroad. For now, the HKMA has made its move, traders are recalculating, and the Hong Kong dollar is back inside its cage. How long it stays there is another story.

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