IS IT SPECULATORS alone that drove the Hong Kong dollar sharply up from its peg against the US dollar or do we have something more substantial here? Let us make the case for something more substantial. There is more to the record of the exchange rate to the US dollar than immediately meets the eye. The rate at which it was traded in the market hovered near the official $7.80 peg rate from shortly after the link was adopted in 1983 until early 1991. Then, as the first chart shows, the market rate strengthened against the US dollar. I shall leave others to explore all the reasons why this happened but suffice it to say that some people found it to their advantage and the Hong Kong Monetary Authority (HKMA) was content to comply, provided the discrepancy remained small. The HKMA never found this entirely satisfactory, however, and was always resolved to bringing the market rate back to $7.80 eventually. It decided not to do it in the Asian financial crisis of 1997-98 (why play with a currency that is already in play?) but then swung into action in 1999 and during 16 months gradually moved the rate back to $7.80 and froze it there. Thus when you hear that on Tuesday the market rate briefly strengthened to a six-year high, the real effect was something more than that. Six years ago a rate of $7.75 was the status quo and the HKMA's control of the rate was more loose. It is unlikely that the traditional bogeyman of a shifty-eyed speculator can alone explain this week's events. The HKMA has had him well tamed in recent years. And now look at the second chart of how that bogeyman has traditionally played his game. On three occasions since the beginning of last year the Hong Kong dollar interbank rates briefly shot up above US dollar interbank rates. They mark brief periods of concern in the market that the Hong Kong dollar might be repegged at a weaker rate. We had a loose-lipped financial secretary back then. The right side of the chart shows you a different picture - lower rates in Hong Kong, a reflection of that sudden strength against the greenback. This suggests a mighty fast change in the speculative mindset if it was speculators alone that produced it. Was there really a speculative swing from expectations of devaluation to expectations of revaluation in just five months? I think something else happened here. This is a sign of confidence returning to Hong Kong and of money starting to come back as it does. There are several reasons for it. On a longer term view, financial asset prices had fallen so low a bounce back was bound to occur at some point, particularly in property when the weighted average interest cost of a new mortgage is only 2.6 per cent and grade A residential investment property yields 6.5 per cent. More immediately there was the recovery from the Sars outbreak, a much more rapid rebound than anyone had hoped and much fuller. This alone has brought renewed confidence. But most of all there was Moody's Investors Service's decision last weekend to put Hong Kong dollar debt on review for a possible upgrade. An earlier pessimistic assessment by Standard & Poor's was largely dismissed as just plain wrong while Moody's call was seen as the one others will now follow. It is not the reason for a change in investment flows but it was probably the trigger. Money was waiting to come back. It now has a signal to do so. Of course, it may still have been traditional speculators who were at the forefront of the Hong Kong dollar buying but what counts is what is behind them. If they alone were in evidence, then it is a good bet the HKMA would have seen them off more quickly. It is more likely the weight of the money behind them that supports them, however. I would be careful about using the word 'speculative' to describe this week's monetary events.