The US Federal Reserve’s decision to slash interest rates to zero is having one unintended consequence in Hong Kong, where the currency is nearing the strongest it’s allowed to go.

The Hong Kong dollar was as strong as 7.7524 per greenback Wednesday. It would take just 25 more pips for the pegged currency to breach the strong end of its trading band with the US dollar for the first time since 2016, which would likely prompt the Hong Kong Monetary Authority (HKMA) to intervene. Such an operation would help replenish the city’s interbank liquidity pool, which has shrunk by 70 percent over the past two years.

The Hong Kong dollar was as strong as 7.7524 per greenback Wednesday

The recent strength follows the HKMA’s decision last week to reduce its base rate by 64 basis points to 0.86 percent, a far less aggressive move than the Fed’s 100 basis-point cut. That’s meant the Hong Kong dollar’s one-month interbank borrowing costs and the corresponding US Libor rate have diverged so much the difference is near the widest since 1999.

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That yawning gap makes higher-yielding Hong Kong dollar assets more attractive: borrowing in the US currency to buy the Hong Kong dollar has been Asia’s most profitable carry trade in the past month. Also pushing up Hong Kong rates is tighter liquidity, with banks hoarding cash for quarter-end regulatory checks. More than twenty days of flows into Hong Kong’s stock market from the Chinese mainland have also increased demand to own the local currency.

“The general expectation is that Hong Kong interest rates cannot catch up with those in the US in the near term,” said Eddie Cheung, an emerging markets strategist at Credit Agricole CIB in Hong Kong. “So the gap stays wide, and favorable for a strong Hong Kong dollar.” He said the currency could probably touch the strong end in the second quarter.

The Hong Kong dollar’s one-month Hibor climbed 3 basis points to 1.87643 percent on Tuesday, widening its premium over Libor to about 90 basis points. The local currency is allowed to trade in a narrow band of 7.75 to 7.85 against the dollar.

The Hong Kong dollar has been the second best performing Asian exchange rate over the past month, trailing only the Taiwan dollar. The Sharpe ratio - a measure of returns adjusted for price swings - shows that the Hong Kong dollar versus the greenback has been the top carry trade in the region over the period.

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This marks a sharp reversal from a month ago when the long Hong Kong dollar strategy lost its luster. It’s also a far cry from the most of the past two years, when the Hong Kong dollar repeatedly touched the weak end of its trading band, prompting the HKMA to buy the local currency to defend the peg.

Traders are betting the interest-rate differential between Hong Kong and the US will widen, as Hibor may stay elevated due to the city’s small pool of interbank liquidity while Libor could stabilize thanks to the Fed’s measures to keep borrowing costs low, according to Carie Li, an economist at OCBC Wing Hang Bank Ltd.

The aggregate balance - an indicator of interbank cash supply in Hong Kong - is at HK$54 billion, close to the smallest since late 2008. That amplifies rises in the local interest rates and thus the Hong Kong dollar.

“The market is speculating on a wider yield differential,” Li said. “If US dollar funding stress eases and the currency falls along with Libor, we do expect to see some further strength in the Hong Kong dollar. And the possibility of touching 7.75 cannot be ruled out.”