BEIJING, March 1 (Reuters) - The Hong Kong dollar struck its weakest level in more than two years on Tuesday, weighed down by abundant liquidity, U.S. rate hike expectations and the Russia-Ukraine war.
A rapidly spreading coronavirus outbreak in the city has also hit investor sentiment. read more
By contrast, after last week's shock rocked financial markets and drove the safe haven dollar higher, broader currency markets were relatively calm on Tuesday amid the fast-moving Ukraine crisis.
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At its lowest point on Tuesday, the Hong Kong dollar traded at 7.8165 per dollar, its softest since December 2019.
The ample liquidity conditions followed a decision by the Hong Kong Monetary Authority (HKMA), the city's de facto central bank, not to expand its Exchange Fund Bills (EFBs) issuance on Tuesday, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
The HKMA has boosted issuance of EFBs at its weekly auctions in recent months to drain excess liquidity from the market.
By not expanding issuance on Tuesday, the HKMA avoided the risk of draining too much liquidity, Cheung said. The HKMA is widely expected to mop up excess liquidity and support the Hong Kong dollar if tightening Fed policy pushes it to the weak end of its trading band.
Fed funds futures traders have fully priced in a 25 basis point interest rate hike at the Fed's March meeting, though the odds of a 50 basis point increase have fallen to around 10%. FEDWATCH
"The pair is likely to remain volatile as the market watches the response from Russia, with immediate bias favouring the USD amid risk-off sentiment," analysts at OCBC Bank said in a note.
The Hong Kong dollar is pegged in a narrow range of 7.75-7.85 per U.S. dollar. The HKMA is bound to start buying or selling the currency to manage its value when it hits either end of the band.
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Reporting by Winni Zhou and Andrew Galbraith Editing by Raissa Kasolowsky
Our Standards: The Thomson Reuters Trust Principles.
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Hong Kong dollar hits 27-month low on flush cash, grim mood - Reuters
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