Hong Kong's de-facto central bank bought HK$4.671 billion (US$595.1 million) from the market in New York trading hours to stop the Hong Kong dollar weakening and to defend its peg to the US dollar.

The latest move to defend the peg came after the Hong Kong Monetary Authority (HKMA) bought US$37.5 billion worth of Hong Kong dollars from the market through 49 rounds of interventions since the US Federal Reserve began hiking interest rates March 2022.

The Hong Kong dollar is pegged to a tight band of between 7.75 and 7.85 versus the US dollar.

The aggregate balance - the key gauge of cash balances in the banking system - will decrease to HK$44.527 billion on May 5, an HKMA spokesperson said on Thursday. This will be the lowest level since 2008.

"The market has sufficient understanding and operational experience of the linked exchange rate system, and continues to have strong confidence in the system," the HKMA said in a statement on Wednesday.

It added that banks were able to properly manage their liquidity to ensure orderly and efficient movements of funds.

Ahead of the Federal Reserve policy meeting, the three-month Hong Kong Interbank Offered Rate (Hibor) jumped 18.9 basis points (bps) to 3.89929 percent on Wednesday, its sharpest one-day leap in nearly two years.

Lower aggregate balance does not necessarily result in persistently higher Hong Kong dollar interest rates as ultimately, interest rates are driven by demand and supply, said John Luk, head of emerging markets trading for Greater China at Credit Agricole CIB.

But with the falling aggregate balance, higher volatility in Hibor should be the "new normal", according to a research note by Standard Chartered published on Tuesday.

Since February the Hong Kong dollar has been at the weak end of its tight trading band, obliging the HKMA to buy Hong Kong dollars.

"The Hong Kong dollar is likely to move more sustainably away from the weak end of the (trading) band when US dollar rates start moving lower as the Fed's easing approaches, likely later this year," Standard Chartered said. (Reuters)