Rates in Hong Kong tend to move in lockstep with U.S. rates, as its currency is pegged to the greenback, although they have lagged their U.S. equivalents in recent months.
The one-month Hong Kong interbank offered rate, or Hibor - a benchmark for pricing mortgages in one of the world's most expensive property markets - advanced for a seventh straight trading session on Friday to 1.01143%, its highest since May 2020.
Other tenors ranging from three-month to one-year Hibor also gained.
Rising funding costs came as the Hong Kong dollar kept hitting the weaker side of its trading band, forcing the monetary authority to intervene and withdraw the unit.
As a result, Hong Kong's aggregate balance, a gauge of liquidity in its banking system, has fallen to a two-year low of HK $165.3 billion.
"Hibor is playing some catch-up with the previous increases in USD Libor, when Hong Kong's interbank liquidity is shrinking upon FX interventions and ahead of the FOMC next week," said Frances Cheung, a rates strategist at OCBC Bank in Singapore.
"Higher HKD rates are part of the FX-interest rate adjustment process, but, as the still supportive interbank liquidity is preventing HKD rates from rising more aggressively, this FX-interest rate adjustment is not done yet."
The Hong Kong dollar is pegged to a tight band between 7.75 and 7.85 against the U.S. dollar, and the Fed's monetary tightening, more hawkish than previously anticipated, has driven up U.S. yields and piled depreciation pressure on it.
The Hong Kong Monetary Authority has bought HK$ 173 billion of its own currency from the market this year, its data shows.
The current linked exchange rate system obliges the HKMA to buy its currency to avoid breaching the weaker limit of 7.85.
(Reporting by Winni Zhou, Tom Westbrook and Alun John; Editing by Jacqueline Wong and Clarence Fernandez)
