Hong Kong dollar’s peg to the greenback remains strong and valid
The recent volatility of the Hong Kong dollar has less to do with its fundamentals than a sign that low interest rates are coming to an end and that the easy money has all been made. If so, it may even be a useful warning
The recent fall in the value of the Hong Kong dollar to a 35-year low against the greenback made good headlines and perhaps alarmed a few panicky investors. But was there ever any doubt that the Hong Kong Monetary Authority (HKMA) would intervene to maintain the local currency’s trading band under the US dollar peg or that it had ample reserves to do so?
Such was its raison d’etre. In the event, the HKMA intervened no less than 13 times and bought HK$51 billion to restore the currency from the weakest end of the range of HK$7.85 to below HK$7.80.
The pressure is now on local banks to close the gap – thanks to ample liquidity in recent years – between their low interest rates and rising rates in the United States, where the US Federal Reserve has demonstrated a willingness to tighten and restore monetary conditions to normal since the outbreak of the global financial crisis a decade ago.
For people in Hong Kong, this means instead of worrying about the local dollar, they should pay more attention to their mortgage payments – and also the potential for the property market to cool off.
Since the financial tsunami, roughly US$130 billion in hot money has flooded into the city. It has proved a bonanza for foreign investors. Now fund flows are reversing, thanks to rising interest rates and economic growth in the US. But the outflow has been no stampede, and nothing the local banking system can’t handle.