Hong Kong dollar nears weak end on low volatility, cheap rates

[HONG KONG] The Hong Kong dollar is heading towards the weak end of its fixed trading range as multi-year low volatility and cheap borrowing costs make it easier for traders to short the currency against the greenback.

One-year dollar/Hong Kong dollar implied volatility has dropped to its lowest since January 2022, according to data compiled by Bloomberg, partly due to a lack of rush for US dollars in the city at the start of the Iran war.

Analysts see this calm as a conducive backdrop to short the local dollar against the higher-yielding greenback, a carry trade that’s nudging the local currency near the weak end of its 7.75 to 7.85 per US dollar range.

Short-term borrowing rates in Hong Kong have stayed moderate into quarter-end compared with previous years, further allowing traders to remain bearish without the risk of a sudden funding squeeze.

“Carry trade is attractive given the low volatility of USD/HKD,” said Carie Li, a strategist at DBS in Hong Kong. “Muted pressure in Hong Kong dollar liquidity also helps, as the rise in Hong Kong dollar rates is moderate.”

She expects the local currency to weaken to 7.85 per US dollar in one to two months due to the still large US-Hong Kong interest rate gap and the greenback’s strength.

The overnight Hong Kong Interbank Offered Rate has fallen close to 60 basis points so far this month, set for the biggest June drop since 2006. The gap between the one-month Hibor and the one-month Secured Overnight Financing Rate held close to 67 basis points. This gap is driving the carry trade against the Hong Kong dollar.

Muted funding costs in the city have been aided by weaker demand for cash as a slump in local equities curbed financing needs. The Hang Seng Index is on track for its steepest monthly drop in two years.

The Hong Kong dollar held near 7.84 per US dollar on Thursday morning. The currency has been relatively stable this year after whipsawing between the weak and strong ends of its trading band in 2025 as US dollar volatility and shifting funding costs drove swings. The Hong Kong Monetary Authority had stepped in multiple times last year to keep the currency boxed in within its allowed trading range.

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“Persistent low funding costs and still sizeable USD-HKD rate differentials will likely continue to encourage carry trades,” said Cindy Keung, economist at OCBC Bank (Hong Kong).

Unlike elsewhere, low demand for US dollars during the Iran conflict kept Hong Kong’s currency volatility muted, she said.

“It may take multiple weeks before the spot USD/HKD reaches the 7.85 level, though the market has already started pricing the potential triggering of foreign-exchange intervention.” BLOOMBERG