HKMA Intervenes to Defend HKD/USD Peg Amid Currency Volatility
On June 17, 2025, the US and China agreed on a trade deal involving a 55% US tariff on Chinese goods and supply commitments on rare earths, following intensive talks in London. Recent tariff hikes on products like semiconductors took effect January 2025, with further increases planned through 2026.
Executive Summary
On July 2, 2025, the Hong Kong Monetary Authority (HKMA) intervened once again to defend the HKD/USD currency peg at the weak-side level of 7.85. The HKMA sold US$2.55 billion in US dollars, reducing the Aggregate Balance—a key indicator of interbank liquidity—to US$18.36 billion. This intervention marks a period of heightened currency volatility and liquidity challenges, underscoring the HKMA’s commitment to maintaining exchange rate stability amid global financial uncertainty. The move is notable as part of a rare dual-end intervention pattern observed in 2025, reflecting significant shifts in capital flows and funding conditions.
Latest Development
On the morning of July 2, 2025, the HKMA sold US$2.55 billion at the 7.85 HKD/USD level in the foreign exchange market to defend the peg. This action directly reduced the Aggregate Balance—the banking system’s available liquidity—from its previous level to US$18.36 billion. This move follows a similar intervention less than a week earlier, highlighting sustained pressure on the currency and persistent liquidity concerns. The intervention was prompted by ongoing volatility in global markets and low local funding costs, as Hong Kong’s interbank offered rates (HIBOR) remain subdued despite US dollar strength and capital outflows [1][4].
Recent Developments
- Early May 2025: The Hong Kong dollar briefly strengthened, triggering the strong-side Convertibility Undertaking. The HKMA sold HKD for USD, increasing the Aggregate Balance and lowering HIBOR rates [2].
- June 2025: The HKMA’s Currency Board Account showed a significant increase in foreign currency assets and the Monetary Base due to active currency interventions and capital market activities [3].
- June 30, 2025: The HKMA reported total Exchange Fund assets of HK$4,159.5 billion, with increased backing assets mainly from US dollar purchases. The Backing Ratio rose to 110.88% [3].
- July 1, 2025: The HKMA intervened to support the local currency after persistently low HIBOR rates and ongoing US dollar volatility [4].
- July 2, 2025: The latest intervention saw the sale of US$2.55 billion to maintain the peg at 7.85, reducing the Aggregate Balance to US$18.36 billion [1].
Key Impact & Analysis
The HKMA’s interventions underscore the stress on Hong Kong’s currency board system amid global market volatility and capital outflows. The reduction in the Aggregate Balance signals tighter liquidity, which may drive up HIBOR rates and increase borrowing costs locally, impacting banks, corporations, and real estate markets. The rare occurrence of both strong-side and weak-side Convertibility Undertakings in a short period reflects substantial two-way capital flows and heightened uncertainty.
For market participants, the HKMA’s readiness to deploy reserves and adjust liquidity is a clear signal of its determination to uphold the Linked Exchange Rate System. However, repeated interventions could strain available reserves if volatility persists. The rise in the Backing Ratio and increases in foreign currency assets suggest the HKMA remains well-resourced, but the ongoing pressure may test market confidence in the peg, especially if US interest rate policy becomes more unpredictable or if outflows accelerate [2][3].
The broader implication is a potential repricing of Hong Kong assets, higher funding costs, and the risk of tighter credit conditions. These factors could affect property markets, equity valuations, and overall financial stability in the territory.
Looking Forward
Market participants will closely watch for further interventions by the HKMA and shifts in the Aggregate Balance as indicators of liquidity stress and exchange rate pressures. Upcoming US Federal Reserve decisions on interest rates and global risk sentiment will be critical in determining future capital flows and the stability of the HKD/USD peg. If volatility and outflows persist, additional defensive actions—including liquidity injections or further currency sales—may be required.
Key dates to monitor include the next US Federal Reserve meeting and any subsequent HKMA press releases. If HIBOR rates rise sharply or Aggregate Balance falls further, it could signal growing market strain and raise the probability of more frequent or larger interventions to maintain Hong Kong’s exchange rate stability.
Sources
- https://www.centralbanking.com/foreign-exchange/7973254/hong-kong-intervenes-once-again-to-protect-currency-peg
- https://www.hkma.gov.hk/eng/news-and-media/press-releases/2025/06/20250619-3/
- https://www.hkma.gov.hk/eng/news-and-media/press-releases/2025/06/20250630-4/
- https://www.chinadailyhk.com/article/615103
- https://www.hkma.gov.hk/eng/news-and-media/press-releases/2025/06/20250630-5/
