Hong Kong Sells More U.S. Dollars to Defend Currency Peg

In recent days, the Japanese yen has touched its lowest levels in 24 years against the dollar, while one broader measure of the U.S. currency’s strength, the WSJ Dollar Index, has advanced to its highest level since 2002.

Hong Kong’s currency has been tied to the U.S. dollar since 1983 and trades within a permitted range of 7.75 to 7.85 Hong Kong dollars per U.S. dollar. The city’s de facto central bank sells U.S. dollars if the local currency gets too weak or buys them if the Hong Kong dollar gets too strong.

On Tuesday and Wednesday, the city’s monetary authority sold $3.24 billion worth of U.S. currency holdings in transactions in Hong Kong and New York hours, it said in three statements.

The Hong Kong Monetary Authority’s dollar sales this year have already surpassed its total from 2019, the last year when it had to sell reserves to shore up the local currency.

Measured in local-currency terms, the authority has sold more than HK$43 billion worth of U.S. dollars this year, versus HK$22.13 billion in 2019. It spent more than HK$103 billion during an earlier bout of Hong Kong dollar weakness that lasted from April to August 2018.

“Hong Kong has abundant foreign currency reserves,” Christopher Hui, the city’s secretary for financial services, said Wednesday in a written reply to a question posed by a member of the city’s Legislative Council. He said Hong Kong has more than $460 billion worth of foreign-currency reserves, or roughly 1.7 times its monetary base, as of the end of May.

The HKMA’s purchase of Hong Kong dollars will drain liquidity from the local financial system, helping to increase borrowing costs. Short-term interest rates in the city’s interbank lending market have lagged behind those in the U.S., making the Hong Kong dollar relatively less attractive.

The one-month Hong Kong Interbank Offered Rate, or Hibor, jumped 0.14 percentage point Wednesday to 0.52%, its highest point since September 2020. The equivalent one-month London interbank offered rate for U.S.-dollar borrowing stood at 1.32%, according to FactSet.

Analysts have said the HKMA has the tools in place to maintain the peg, which they believe isn’t likely to break soon.

“The pace of intervention has not exceeded the level we saw in 2018,” when the U.S. also hiked interest rates, said Ju Wang, head of Greater China foreign-exchange and rates strategy at BNP Paribas.

While removing liquidity from the Hong Kong financial system is boosting Hibor, the rates still trails U.S. Libor, suggesting the Hong Kong banking system is “very, very flush” with funds, Ms. Wang said.

Write to Dave Sebastian at dave.sebastian@wsj.com