Looming US rate rise spells trouble for Hong Kong households and firms

The mighty US dollar has gone from strength to strength. There are myriad reasons for this; some will have a direct impact on Hong Kong's economic outlooks through our currency peg and close trade ties.

A slew of new US data signals a firm domestic recovery. America's current account deficit improves; its private sector has deleveraged; recurrent jobless claims are down; and there is a boom in domestic energy production. The country's improving growth prospects especially contrast with a slowdown in China, and disappointing data from Japan and the euro zone.

Now everyone wants to own assets from a country that triggered the global financial crisis more than half a decade ago.

The shock announcement by the Bank of Japan late last month to expand its stimulus programme has further weakened the yen and sent the dollar soaring.

The US dollar index - a measure of its value against a basket of other key currencies - is within sight of a recent four-year high. The greenback is now at a multi-year high against both the yen and the euro. After recently ending quantitative easing, the US Federal Reserve is expected to start raising interest rates sometime next year, so the dollar may still have a way to go. An improving US economy is a definite plus for Hong Kong's external trade.

But for the city, there is perhaps nothing more economically sensitive than rate hikes in the United States. Having enjoyed historically low borrowing costs for such a long time, our city may be in for a shock, especially for households that are now carrying a heavy mortgage as well as investors and companies with a high debt load. With the easing of the mainland market and a big property bubble, rising rates, especially if they are sustained, may create a perfect economic storm for the city.