Hong Kong Monetary Authority says outlook for local currency uncertain

HONG KONG (Reuters) -The Hong Kong Monetary Authority (HKMA) said on Thursday the outlook for the direction of the Hong Kong dollar and for interbank rates remains uncertain due to carry trades and other factors.

The city's de-facto central bank made the comments in response to the U.S. Federal Reserve's overnight decision to keep rates unchanged.

"If carry trades are to persist, the Hong Kong dollar exchange rate may weaken further, and may even trigger the weak-side," HKMA said, referring to the possibility of the currency hitting 7.85 per U.S. dollar.

The Hong Kong dollar is pegged in a tight band between 7.75 and 7.85 to the U.S. dollar.

It whipsawed from one end of its narrow trading band to the other in just a few weeks over May and June, as foreign and Chinese capital flocked to blockbuster share offerings or picked up undervalued stocks in Hong Kong.

That caused domestic interbank rates to plunge, spurring speculative positions that used borrowings in the Hong Kong dollar to bet on other markets.

The Hong Kong dollar has for weeks languished near the weak end of its band and last stood at 7.8498 per dollar.

Analysts at HSBC said in their currency outlook report that the Hong Kong dollar may "soon test 7.85".

However, they said that the HKMA has sufficient foreign exchange reserves to defend the currency when it hits the 7.85 per dollar level.

(Reporting by Summer Zhen and Rae Wee; Editing by Sam Holmes)

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