Investment banks have substantially reduced short positions in Hong Kong dollar forwards as nervousness over recent corrections in global markets combined with fears the SAR may be forced to follow Malaysia's lead and adopt capital controls, according to brokers. The scaling down of positions followed Malaysia's decision to restrict currency trading in an attempt to ease pressure on the ringgit. The Hong Kong Monetary Authority has denied any controls will be introduced. Despite the authority's reassurances, traders said investment banks covered as much as US$500 million worth of Hong Kong dollar forwards yesterday. Morgan Stanley, which was also a strong buyer in the equity futures market, was seen actively covering short positions. NatWest Markets head of money markets and interest-rate trading Andy Lim said banks were worried that Hong Kong authorities would introduce capital controls. 'They were desperate to sell, especially in the afternoon,' he said. On Monday, HKMA chief executive Joseph Yam Chi-kwong said Hong Kong would not adopt foreign exchange controls. Yesterday's selling drove forward premiums and term money market rates lower. Overnight rates were also sharply lower, aided by a substantial cash injection from the HKMA from mid-morning. The overnight rate closed at 4.5 per cent, a dramatic 10.5 percentage point plunge from Monday's 15 per cent. The benchmark three-month rate fell from its opening level at 15.5 per cent to 12.25 per cent. The premium on one-month forward slid from 850 points to 450 points. The three-month forward premium lost 750 points to 1,150 points. As liquidity in the forward market had fallen significantly since the start of last week, modest turnover had been enough to trigger significant price movements, traders said. Mr Lim said speculators might be reluctant to trade in Asian markets until the 'dust settled'. 'You can't get out in one day what you have been building up for months.' HSBC Markets head of interest rates Mike Powell said interest rates around the world had eased after Wall Street fell 6.36 per cent on Monday night. 'The view of rates has changed a lot today,' he said. Mr Powell cast doubt on whether massive short forward positions that a select group of banks are rumoured to have accumulated would prove profitable. Bank of America head of global currency strategy for Asia Marshall Gittler said renewed strength in the yen was due to short-covering rather than any improvement in fundamentals.