The Hong Kong dollar retained a soft tone on Wednesday amid persistent buying interest in the US dollar and despite gains in the local stock market. The domestic currency was trading at 7.7803/04 to the US dollar the weakest level since June 2005 - softening from Tuesday's local close of 7.7796/98.
Some dealers said the softness might be related to arbitrage trading, as local interbank rates are still lower than US rates and as some corporate demand for the US dollars in recent sessions.
"Abundance of funds in the market slowed the upside of interbank rates despite the fact that the current red hot IPO tied up a bit of the liquidity," one trader said. The share offering of China Merchants Bank, the country's sixth-largest lender, to retail investors closed on Wednesday and was more than 170 times subscribed, sources said.
Arbitrage traders were selling Hong Kong dollars for US dollars to take advantage of interest rate differential. Under the territory's linked exchange rate system, the Hong Kong dollar can trade between 7.75 and 7.85 to the US dollar.
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