The Hong Kong dollar recorded its sharpest two-day drop against the US dollar in more than a dozen years amid mounting concern about continued capital outflows from the city and the cooling mainland economy which triggered a free fall in the stock market.

The currency extended losses on Friday to trade at HK$7.7929 against the greenback as of 9 pm in Hong Kong, after a 0.29 percent slide on Thursday - marking its steepest loss in 12 years. Still, it is within its permitted range of HK$7.75 to HK$7.85 - a rate it last reached in 2011.

The losses take its two-day drop to 0.4 percent and one-week decline to 0.38 percent.

Financial Secretary John Tsang Chun-wah sought to calm jitters on Friday morning. He said the Hong Kong dollar at the moment was still within its normal trading range and remained on the stronger side of the peg amid a complicated global foreign exchange situation.

Under the Hong Kong dollar peg, the Hong Kong Monetary Authority (HKMA) will intervene whenever the Hong Kong dollar declines to the weak end of the peg at 7.85 or rises to the strong end at 7.75.

Tsang did not rule out the possibility that the Hong Kong dollar might drop to the weaker end of the peg.

"With US interest rates going up, capital outflows from Hong Kong are a natural occurrence. Since the local market has seen multibillion-dollar capital inflows earlier, it is quite natural that this money would flow out of the market at some stage, which inevitably makes the local dollar weaker," Tsang said.

Over the past seven years, there has been some $130 billion of hot money inflows into the city, following the monetary easing policy in the US since 2008 that kept interest rates close to zero.

"The sharp weakening of the Hong Kong dollar against the greenback is a result of the recent slump in the stock market, as investors, mainly from overseas, aggressively sell their stocks and move the capital out of the Hong Kong market," said Nathan Chow Hung-lai, an economist of group research at DBS Bank (Hong Kong) Ltd.

While the US interest rate hike is believed to be one of the driving forces leading to the situation, Chow believes the main reason lies in investors' anxiety and a lack of confidence over the mainland economy.

Contact the writers through sophia@chinadailyhk.com

(HK Edition 01/16/2016 page6)