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SCMP Reporter

Hong Kong dollar forward rates yesterday made their biggest one-day jump this year as a government denial that the peg would change failed to calm markets.

One-year forward contracts for Hong Kong dollars changed hands as much as 300 points higher than the standard spot rate of HK$7.8 per US dollar. This put the one-year forward rate at HK$7.83. The contract traded 100 points higher on Thursday.

A short statement sent out by government press officials in Financial Secretary Antony Leung Kam-chung's name was not enough, said a trader.

'I would have thought on a matter such as this the head of the [Hong Kong Monetary Authority] or Antony Leung had to reaffirm to the market their commitment to the peg.'

While the spot rate for the Hong Kong dollar trades in a tight band to the peg, the rates on futures contracts can move higher if traders start to worry that the peg might not be around tomorrow and demand a premium for the risk.

In normal market conditions, one-year forwards might be 50 points higher or lower than HK$7.8 due to demand and supply fluctuations.

The one-year spot rate was as much as 2,000 points higher during the Asian financial crisis.

The official statement said: 'The Government has no plan nor intention to change the linked exchange rate system. Any rumours to the contrary are totally unfounded and speculative.'

Few investment professionals believe that a change to the currency board system is imminent, particularly with the financial turbulence in the wake of the September 11 terrorist attacks.

Recent comments by Mr Leung in which he described the dollar peg as an 'obstacle' to Hong Kong's economic flexibility and efficiency have caused traders to question the Government's long-term commitment.

'The worry is there could be some kind of inconsistency in government policy,' said Frank Gong, a currency strategist at Bank of America.

The peg has resulted in the Hong Kong dollar looking expensive compared to other currencies in the region, which have mostly gone through hefty devaluations.

The peg has meant that Hong Kong has had to take its economic pain from tumbling prices for assets such as stocks and property, rather than a weaker currency.

With the peg remaining firmly in place, Citigroup Asset Management has predicted that deflation will extend until next year. This would leave the property market in the doldrums and could start to erode the asset quality of banks, as borrowers find it tougher to pay for flats that have already lost half their value.

A quick fix of a devaluation would be a mistake, said Fred Hu, an economist at Goldman Sachs.

'We believe a . . . change to the peg is not going to [benefit] the economy,' he said. 'You end up gaining little but losing hard-won credibility.'

Stephen Roach, chief economist for Morgan Stanley, refused to be drawn on the controversy of whether the SAR would benefit from changing the currency board system it had kept for 17 years.

'We are not going to comment on the peg,' he said. 'The peg is solid and there is no reason to raise any concerns it will change over the near term, the medium term or the long term.'



Dollar forward-rate contracts renew doubts about peg despite denial