HKMA warns carry trades, weak currency to spike borrowing costs in Hong Kong

Caution follows its decision to keep the city’s base rate unchanged in lockstep with the Fed’s overnight move amid inflation threats

Reading Time:3 minutes

The HKMA is wary of the impact of carry trades on the Hong Kong dollar and local interbank rates. Photo: Felix Wong

Published: 7:00am, 19 Jun 2025Updated: 6:03pm, 19 Jun 2025

The Hong Kong Monetary Authority (HKMA) said widening interest-rate gaps between local and offshore markets over the past month could intensify carry trades and weaken the local currency, leading to higher borrowing costs for property owners and consumers.

The city’s interbank rates slumped in May after authorities flooded the market with liquidity by selling the local dollar to prevent it from breaking its HK$7.75 to HK$7.85 trading band. That move diminished the appeal of local assets versus US dollar assets that pay about 3 percentage points higher.

The gap has incentivised carry trades – a strategy that involves borrowing money in a currency with a low interest rate to invest in a currency with a higher interest rate – pushing the Hong Kong dollar towards HK$7.85 per dollar over the past few weeks, the HKMA said in a statement on Thursday. The Hong Kong dollar traded at 7.8498 per US dollar as of 5.30pm Thursday.

“If carry trades are to persist, the Hong Kong dollar exchange rate may weaken further,” it said. In such a case, the HKMA would intervene by selling US dollars and buying Hong Kong dollars, mopping up liquidity and gradually driving up local interbank rates, it added.

Hong Kong Monetary Authority at the International Financial Centre in Central. Photo: Shutterstock

Three-month interbank offered rates stood at about 1.53 per cent on June 19, according to the Hong Kong Association of Banks. The equivalent US dollar London interbank offered rate was 4.85 per cent.