The Hong Kong dollar hovered close to its pegged rate of 7.80 to the US dollar on Tuesday and dealers said there were signs it could test that level soon. The local currency has been pressured recently because US interest rates are higher than Hong Kong rates, enabling traders to earn an interest rate spread if they sell Hong Kong dollars for US dollars.

Although the Hong Kong dollar is linked to the greenback, local banks shrugged off most of the Fed's rate increases last year because of surplus cash in the banking system.

The HK dollar was trading at 7.7999/7.80 against the US dollar. The discount on one-year forwards narrowed to 1,160/1,140 pips from Monday's close of 1,310/1,290 pips. In the cash market, interbank rates rose across the board after the capital outflow.

Copyright Reuters, 2005