How will the Hong Kong dollar move in the future? The triple game behind the reversal of the USD/HKD exchange rate

The recent trend of the Hong Kong dollar is quite interesting. In mid-August, the USD/HKD exchange rate broke below 7.79, hitting a new low since May 2025, and then rebounded above 7.80. This rapid change actually reflects the tug-of-war among multiple forces in the market.

**Why did the Hong Kong dollar suddenly strengthen?**

The first driver is the strong performance of the Hong Kong stock market. From August 14 to 19, southbound funds have been net inflowing into Hong Kong stocks, with a single-day net purchase of HKD 35.9 billion on August 15. What does this mean? A large amount of foreign capital is exchanging into HKD to enter the market, increasing demand for the Hong Kong dollar, which naturally makes it more valuable. Coupled with the Hong Kong Monetary Authority’s previous continuous interventions, liquidity in the HKD has temporarily become tight.

The second driver comes from hedge fund position unwinding. Hedge funds that previously shorted the HKD (holding long USD positions) have started to take profits. Barclays estimates that about 30% of these funds’ USD/HKD long positions have been closed. When short sellers rush to cover their positions, it naturally pushes up the HKD price.

The combination of these two forces explains why the HKD has experienced this appreciation.

**What will happen to the HKD next?**

It depends on several key factors. First, although the HKD has appreciated, it has not yet touched the strong-side convertibility guarantee of 7.75, so the HKMA is not in a hurry to intervene. Second, whether southbound funds can continue to flow in remains uncertain—if Hong Kong stocks weaken further, funds may flow out, and the HKD will lose upward momentum.

China Merchants Bank’s view is that the HKD may appreciate modestly, but it is unlikely to break below the strong-side convertibility guarantee of 7.75 in the short term. More analysts believe that unless the Federal Reserve begins a large-scale rate cut cycle, the space for the HKD to continue appreciating is limited. In other words, the USD/HKD trend ultimately depends on the Fed’s stance.

In summary: the current appreciation of the HKD is the result of multiple factors resonating, but whether this strength can be maintained depends on two variables—southbound capital flows and Federal Reserve policies.