'The current system is working effectively,' concludes a currency board committee There is no need to introduce a formal Hong Kong Monetary Authority (HKMA) commitment to prevent the Hong Kong dollar from strengthening beyond its peg to the US dollar, an advisory committee said yesterday. The sub-committee on currency board operations also noted that it was supportive of the actions taken by the HKMA to dampen 'excessive market volatility' during the recent strengthening of the Hong Kong dollar, minutes from its November 7 meeting showed. The conclusion was that 'the current system is working effectively and it is not necessary to introduce a strong-side convertibility undertaking'. Under the currency board system, the HKMA is obliged only to support the Hong Kong dollar if it weakens below the $7.80 level at which it is linked to the greenback. It has no similar obligation to prevent its strengthening. Since the Hong Kong dollar's rapid strengthening to $7.705 against the US dollar on September 22, the HKMA has spent US$1.51 billion on buying greenbacks, which helped push the local unit back to about $7.76. Initially, the interventions happened at different levels, causing some confusion in the market about the degree of Hong Kong dollar strength the HKMA was prepared to accept. This made traders unwilling to buy and hold US dollars for fear the exchange rate may move against them and prompted calls for a two-way convertibility undertaking. 'Because the HKMA didn't immediately defend the peg on September 22, it to some extent damaged people's faith in its commitment to the peg and brought volatility and instability to the market,' said one trader at a European bank. More recently, HKMA chief executive Joseph Yam Chi-kwong has stressed the de-facto central bank's intention to bring the Hong Kong dollar back to $7.80, but this has proved only partially successful. An improvement in the local economy, a rallying stock market, speculation about a revaluation of the yuan and a weakening of the US dollar against most major currencies continue to put upward pressure on the Hong Kong dollar. A two-way convertibility undertaking would mean the HKMA could be relied upon to convert US dollars into Hong Kong dollars at a guaranteed rate, just as it is now committed to converting in the other direction at a rate of $7.80. The advisory committee did not explain why this was not the right time to introduce such a system but when it last discussed the issue, in July 2000, it said too rigid an arrangement would play into the hands of speculators. Too narrow a bid-offer band could also lead to a substantial part of the Hong Kong-dollar foreign-exchange business disappearing, the committee said. 'Two-way convertibility basically would kill off the banks' forex business, which is something the HKMA doesn't want to do, so I think that will be a last resort,' the trader said. Stage one, he said, was intervention, and if the HKMA had failed to push the Hong Kong dollar back to 7.80 against the US dollar by Lunar New Year, it may move to stage two, which would be to start charging banks for holding idle Hong Kong-dollar funds in HKMA accounts. 'I believe that would do it but if not, by the end of March, two-way convertibility could be an option,' he said.