Investors are rushing to sell Hong Kong dollars and buy US dollars, engaging in carry trade to profit from interest rate differentials. This is pushing the Hong Kong dollar close to its weakest range of 7.85 per dollar.
On August 20, 2026, at 10:28 AM, Bloomberg News reported that speculative trading driven by Carry Trade strategies was pressuring the Hong Kong dollar to weaken towards HK$7.85 per US dollar, the weakest level allowed under Hong Kong's pegged exchange rate system.
Data from the Depository Trust and Clearing Corp. (DTCC) indicates that on Wednesday, the trading volume of call options on the US dollar/HKD pair was approximately four times higher than that of put options for contracts valued at $100 million or more. This reflects the fact that many investors are still betting on a stronger USD/HKD pair, or in other words, a further weakening of the Hong Kong dollar.
Nathan Sinclair, Head of Asian Forex Options at Crédit Agricole CIB in Hong Kong , said the market continues to see demand for short-term USD/HKD call options due to attractive carry trade returns, while demand for longer-term contracts is lower.
The Hong Kong dollar closed virtually unchanged on Wednesday at HK$7.8409 per US dollar, despite the US dollar weakening against most major currencies after the US Treasury Department announced an increase in its long-term Treasury bond repurchase program.
This level keeps the Hong Kong dollar close to 7.85 per US dollar, the weakest level under Hong Kong's Linked Exchange Rate System and the level the Hong Kong dollar last touched about a year ago.
A key factor pressuring the Hong Kong dollar stems from the wide interest rate differential between the United States and Hong Kong. Currently, the US one-month Secured Overnight Financing Rate (SOFR) is around 3.65%, while the Hong Kong Interbank Offered Rate (HIBOR) for a similar maturity is around 2.63%. This means the US interest rate is approximately 1.02 percentage points higher than Hong Kong's, creating an opportunity for investors to profit from this difference by selling Hong Kong dollars and buying US dollars.
The exchange rate risk of this strategy is also relatively limited, as Hong Kong manages its currency within the range of HK$7.75-7.85 per US dollar.
Bosco Wu, a strategist at Bank of East Asia, stated that the interest rate spread between the US dollar and the Hong Kong dollar remains attractive, especially in a climate of low currency volatility.
However, as the Hong Kong dollar weakened and approached the lower boundary of its trading range, some investors began to take profits from their long USD/HKD positions, resulting in the Hong Kong dollar recovering somewhat from its weakness over the past week.
Nathan Swamy, Head of Foreign Exchange for Asia Pacific at Citigroup, said that some investors reduced their long USD/HKD positions when the currency pair approached the upper edge of the trading range, partly to lock in profits, and some investors were ready to reopen positions if USD/HKD retraced.
Despite profit-taking, the market still perceives the risk in the coming weeks to lean towards a USD/HKD rise to 7.85, as investor sentiment generally favors a stronger US dollar against the Hong Kong dollar.
Ivan Stamenovich, Head of Currency Trading for Asia Pacific in the G10 region at Bank of America, stated that the profit-taking occurred as merely a short-term adjustment, while the overall market still holds long USD/HKD positions due to continued carry trade incentives.
Therefore, the level of HK$7.85 per US dollar has become a key point for the financial markets to watch. If the currency weakens to that level, it may lead to the Hong Kong authorities initiating their currency stabilization mechanisms.
Reference: bloomberg.com
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