Hong Kong dollar crisis: Traders increased their positions on the Hong Kong dollar decline. The exchange rate of this currency fell by almost 1% after an 18-month peak in December. The decline of the inter-bank loans rate resulted in the widening of the gap with rates similar to those in the U.S. to the maximum since 2008. The wide spread made it profitable to buy Hong Kong currency – traders could borrow it cheaply and sell it for U.S. dollars, which have higher rates.

Are we in for a Hong Kong dollar collapse? 

The benchmark foreign exchange market in Hong Kong HIBOR (Interbank Offered Rate) has gone into a decline. Now HIBOR is 160 bps lower than LIBOR, which is calculated for several currencies, including the U.S. dollar. For comparison: in early December HIBOR was 90 bp above LIBOR. Today the Euro / U.S. Dollar rate looks more optimistic. 

According to Kelvin Lau, senior economist at Standard Chartered (LON:STAN) Bank Hong Kong, the fall in the Hong Kong dollar was exacerbated by the high-base effect.

“The combination of a less tight Fed rate outlook and improved prospects for a resumption of local market operations likely fueled expectations for renewed capital inflows,” Lau said.

Banks expected limited currency liquidity after the holidays in December, but their initially pessimistic forecasts didn’t materialize. Analysts at Oversea-Chinese Banking believe the USD/HKD pair is likely to remain above the 7.80 level in the short term. The growth potential of the HIBOR – LIBOR spread is limited, experts said. The exchange rate of HKD was 7.83 on January 27.

Bill Ackman, founder of hedge fund Pershing Square (NYSE:SQ), said last November that he was betting on Hong Kong’s currency falling and ending its peg to the U.S. dollar. Hayman Capital founder Kyle Bass and billionaire George Soros shared the same pessimistic view of Hong Kong’s currency.

Earlier we reported that Brazil and Argentina want to create their own “euro”.