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Hong Kong Monetary Authority (HKMA)

HK dollar defies HKMA to keep climbing on hot money flows

PUBLISHED : Thursday, 25 October, 2007, 12:00am
UPDATED : Thursday, 25 October, 2007, 12:00am

The Hong Kong dollar continued to appreciate yesterday as a flood of liquidity stymied efforts by the city's de facto central bank to prevent the currency strengthening.

The currency reached a three-year high earlier this week, with economists warning that an influx of hot money will cause inflation to accelerate, driving up asset prices such as property and equities.

The Hong Kong Monetary Authority intervened in the foreign exchange market on Tuesday for the first time in more than two years, buying HK$775 million worth of US dollars to weaken the local currency.

Despite the intervention, the US dollar was at HK$7.7504 late yesterday, against HK$7.7508 on Tuesday. It was earlier fixed at HK$7.7503.

HKMA chief executive Joseph Yam Chi-kwong said the decision to intervene was 'normal and reasonable'.

'We will do so whenever there's a need to normalise the relationship between the currency and interest rates,' Mr Yam said.

'It has proved to be effective, as rates have eased and the Hong Kong dollar weakened a bit.'

He said Hong Kong was facing inflationary pressure due to the weakness of the US dollar and appreciation of the yuan.

However, Mr Yam said productivity had offset some pressures. 'The productivity rate has been maintained at 4 to 5 per cent over the past few years and that could ease the inflationary pressure.'

Dealers said the continued influx of liquidity would keep the Hong Kong dollar strong.

Short-term interbank rates were generally lower as the aggregate balance of the Hong Kong dollar in the foreign exchange market increased after the HKMA's intervention.

Huge demand for initial public share offerings, including, has exacerbated the strength of the local currency.

The Hong Kong interbank offered rate eased from 4.7 per cent to 4.05 per cent late yesterday, while the benchmark three-month rate was 4.78 per cent, down from 4.9 per cent.

Market watchers expect the Hong Kong dollar to hover at the upper convertibility trading band and the HKMA may again step into the foreign exchange market.

'The Hong Kong dollar is likely to hit the ceiling of HK$7.75 to the US dollar considering the recent flurry of IPOs,' said Alan Luk Ting-lung, a treasurer at American Express Bank. 'Speculation on the territory abandoning its currency peg does not stand.'

The Hong Kong dollar is pegged to the US dollar.

Yi Gang, an assistant governor of the People's Bank of China, reiterated yesterday that Hong Kong retained full autonomy on the currency under the 'one country, two systems' principle.