Hong Kong Dollar falls to weak end of trading band amid Covid fears

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Hong Kong Dollar falls to weak end of trading band amid Covid fears

The Hong Kong dollar fell into the weak half of its trading band for the first time since December 2019 as a result of a new coronaviruses variant that hurts the appetite for risk assets.

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The exchange rate fell to as low as 7.8020 per greenback, passing the midpoint of its 7.75 to 7.85 allowed trading range against the U.S. currency. The Hong Kong dollar fell by 0.3% in November to head for its biggest monthly loss since February 2020.

The dollar was under pressure on Hong Kong this month as the greenback rallied on bets that the Federal Reserve will tighten policy sooner due to robust U.S. growth data. The Hong Kong dollar was further weighed down by the emergence of a new Covid variant, known as omicron, as it spurred doubts on the global economic recovery. It's not helping with sentiment, said Irene Cheung, a foreign exchange strategist at Australia New Zealand Banking Group Ltd. in Singapore. We don't expect the Hong Kong dollar to trade swiftly to 7.85 at this point. It's likely that it will be a gradual move unless the dollar gains more strength. The Hong Kong dollar's decline comes with losses in other non-haven assets. The Australian and New Zealand dollars also fell on Tuesday among the Group-of-10 currencies, while the Thai baht led the drop in emerging Asia. The selloff intensified after Moderna Inc. CEO said existing vaccines may struggle to cope with the new Covid 19 mutation. In November, the Bloomberg Dollar Spot Index has risen 2.1%, which is its best monthly advance since June.

The drop above 7.8 puts the Hong Kong dollar closer to the weak end of its trading band, which will prompt the local monetary authority to intervene. The increase in debt issuance by the city's central bank over the remaining year could drain interbank liquidity and make it less lucrative for traders to short the Hong Kong dollars.

The last episode of frequent intervention from the Hong Kong Monetary Authority took place in 2019 at the weak end of the trading band. That was when traders jumped up borrowing of the city's currency cheaply and sold it against the higher-yielding dollar to profit from the interest-rate difference. The carry trade is no longer lucrative, as the rate gap between the two currencies has narrowed.

The Hong Kong dollar was little changed at 7.7997 as of 4: 21 p.m. local time.

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