(Bloomberg) — Hong Kong’s de facto central bank bought the local dollar to prop it up on Thursday, in a move to defend the city’s currency peg to the greenback. 

The Hong Kong Monetary Authority purchased HK$9.42 billion ($1.2 billion) of local currency against the US dollar, after the exchange rate touched the weak end of the permitted 7.75-7.85 per greenback trading band. 

In addition to pushing the currency back into its permitted trading range, the move will also make bearish bets more costly. It does this by draining liquidity from the financial system and driving up borrowing costs. 

The last time HKMA intervened in this direction was in May 2023. 

In May, the Hong Kong Monetary Authority injected a large amount of liquidity into the financial system to rein in what had become a rapid appreciation of the currency amid broad US dollar weakness. But that helped push borrowing costs lower and drove the spread between local interest rates and those in the US to a record. 

When Hong Kong dollar’s funding costs are significantly lower than those in the greenback, traders tend to borrow the city’s currency and sell it against its higher-yielding US counterpart to earn the interest-rate difference. That’s made it the world’s most rewarding carry trade over the past month by one measure. 

Earlier this year, the Hong Kong dollar had touched 7.75, the strong end of the trading band. Hong Kong’s domestic borrowing costs are now not far from zero.  

The currency edged higher to 7.8495 per US dollar in early Thursday trading in Asia.

The Hong Kong dollar’s slide in May was its biggest monthly slump since 1983 when it was pegged to the US peer. Its volatility triggered fresh debate on if the decades-long peg to the greenback is sustainable, even though there are few signs of an imminent threat to its existence. 

Hong Kong Dollar’s Swings Fuel Talk on How FX Peg May Shift (1)

Hong Kong will maintain its currency’s peg to the US dollar as it is a key success factor, Chief Executive John Lee Ka-chiu told local media in early June, after market speculation about alternatives to a dollar peg.

–With assistance from Matthew Burgess.

(Updates with HKD trading)

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