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Hong Kong Dollar Under Pressure as Liquidity Remains High and US Rate Gap Persists

July 7, 2025 | By CNY Trends

Hong Kong’s dollar is expected to remain weak for an extended period, hovering near the bottom of its trading band, as the city struggles with an oversupply of liquidity and a wide interest rate gap with the United States.

According to a new report by Standard Chartered Bank, the Hong Kong dollar may trade close to HK$7.85 per US dollar—the weaker end of its official HK$7.75 to HK$7.85 peg range—for the next three to six months. Analysts attribute this to persistent carry-trade activity and limited domestic demand for credit, which together are slowing down the impact of the Hong Kong Monetary Authority's (HKMA) efforts to tighten liquidity.

Currency Defense Moves Continue

Since late June, the HKMA has intervened four times to support the peg, drawing down the aggregate balance—a key measure of interbank liquidity—by more than a third to HK$114.5 billion. However, Standard Chartered believes further action is needed. Based on prior episodes in 2019 and 2023, when the aggregate balance dropped to HK$54 billion and HK$45 billion respectively, the exchange rate stabilized for longer periods.

“We see liquidity continuing to be drained by interventions. But this process is likely to be lengthy, taking over three months or even the entirety of the second half,” said Becky Liu, Head of China Macro Strategy at Standard Chartered.

Source

What’s Slowing the Drain?

Hong Kong’s sluggish housing market has reduced loan demand, and there’s been a continued diversification away from USD assets—both of which are dragging the loan-to-deposit ratio even lower from its already 16-year low, according to Liu.

At the same time, carry trades remain attractive. The one-month Hong Kong interbank offered rate (Hibor) is around 1.05%, compared to 4.4% in the US, creating a lucrative opportunity for investors to borrow cheap in Hong Kong and invest in higher-yielding US assets.

Rates to Rebound—Gradually

Standard Chartered expects local rates to rise but at a slow pace. By end-September, the one-month rate gap may narrow to 200–250 basis points, tightening further to 150–200 basis points by year-end. In the long run, the spread may shrink to just 40–50 basis points.

Still, some experts believe looser monetary conditions could eventually stimulate domestic financial activity. According to Jenny Zeng, Deputy Head of Global Fixed Income at Allianz Global Investors, local-currency bond sales jumped 25% in the first half of the year.

“Massive liquidity will continue to drive Hibor lower,” Zeng said. “We expect the rate to normalize, but it should still be lower than the US dollar [rates].”

Source