Nov. 1 (Bloomberg) -- Currency traders are betting in the forward exchange rate market that the Hong Kong Monetary Authority will abandon its currency's 24-year peg to the U.S. dollar as overseas investment floods into the city.

In the forward currency market, an investor can buy Hong Kong dollars now for delivery in 12 months at HK$7.7096 per U.S. dollar, above the HK$7.75 top of the Hong Kong Monetary Authority's permitted trading range. The authority sold HK$7.828 billion ($1 billion) to defend the currency yesterday, twice as much as two previous interventions since Oct. 23.

Investors are buying Hong Kong stocks and property to benefit from the growth of China's economy, which expanded at an annual pace of 11.5 percent in the third quarter. HKMA Chief Executive Joseph Yam, who spent $15 billion stopping the currency from weakening in 1998, said today speculation that he is considering changes in the peg are unfounded.

``The pricing in the forward market shows that money is being placed on bets that Hong Kong will re-value,'' said Chris Turner, head of currency research at ING Financial Markets in London, who believes the authority will prevail. ``Currencies around the world with a dollar peg are under pressure given the U.S. dollar's weakness.''

The Hong Kong dollar, allowed to trade 5 cents either side of HK$7.8, was at HK$7.7545 per U.S. dollar as of 4:03 p.m. local time. The U.S. Dollar Index, measuring the dollar's performance against six major peers, has lost 8.5 percent in 2007 and set a record low of 76.465 yesterday. The Chinese yuan has risen 4.6 percent this year to 7.4534 per dollar.

Rate Differential

The rate to buy Hong Kong dollars in 12 months time, or the so-called 12-month forward rate, has strengthened 0.9 percent since Aug. 15. It reached HK$7.7015, the highest since Jan. 10.

The contract held below HK$7.75 for all of 2006, partly reflecting the lower rates paid for holding Hong Kong dollars than U.S. currency. The interest rate banks charge each other to borrow the Hong Kong dollar for one year is 0.35 percentage points lower than that for the U.S. dollar.

The forward market is ``certainly a reflection of the interest rate differential,'' said Patrick Bennett, a currency strategist at Societe Generale in Hong Kong. ``With more liquidity in Hong Kong, the differential widens and you can get the dollar at a discount against the Hong Kong dollar.''

Bennett said that cash is flooding into the city to subscribe to initial public offerings by Chinese companies. Alibaba.com Ltd., operator of China's largest trading Web site for companies, last week raised $1.5 billion in Hong Kong. The Hang Seng Index has surged 53 percent after China said Aug. 20 it will allow citizens to invest directly in Hong Kong's stocks.

Contrasting Fortunes

The U.S. Federal Reserve has cut its target for the overnight lending rate between banks to 4.5 percent to slow a housing market slump. The People's Bank of China, by contrast, has raised its benchmark lending rate five times this year to 7.29 percent.

It has become costlier to place bets on the peg ending. Volatility implied by U.S. dollar-Hong Kong dollar options expiring in six months rose to a 10-month high of 1.25 percent, according to prices from Tullett Prebon Plc. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options.

``It's a lot more expensive to bet on a break in the peg,'' said Richard Yetsenga, a strategist at HSBC Holdings Plc in Hong Kong. ``The peg won't be adjusted in the foreseeable future. Hong Kong is a logistics and financial services center, and the dollar is still the currency of choice for these services.''

In May 2005, the authority introduced a band, pledging to buy or sell the currency should it rise or fall more than 5 Hong Kong cents from HK$7.8 to the dollar. Before that, it guaranteed to buy 7.8 Hong Kong dollars for every U.S. dollar.

Pressure to Appreciate

``There is no plan or intention to change the system in any way,'' Yam said in a statement on the HKMA's Web site today. ``The linked exchange rate system has been functioning well to deliver exchange-rate stability.''

A forward currency agreement allows an investor to buy or sell a currency at a future date at a pre-set price, and requires no upfront payment. Speculators use forwards to bet on price movements. As a hedge, a company can use a forward to lock in an exchange rate for a future date, mitigating currency risk.

Among the estimated $3.2 trillion a day in foreign-exchange trading, turnover in the forward market is $362 billion, according to the Bank for International Settlements triennial survey published in April. Spot transactions, typically completed in two business days, were $1.005 trillion.

``What the forward market is telling you is that the pressure is not going to go away anytime soon,'' said Russell Jones, global head of foreign exchange and fixed-income research at RBC Capital markets in London, who believes the link will remain. ``The monetary authority is going to have to keep intervening to maintain the peg.''

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

Last Updated: November 1, 2007 04:32 EDT