Weaker US currency will see more hot money flowing into HK, lessening pressure on interest rates An investment expert predicts that the performance of the US dollar will have a major effect on the Hong Kong stock market this year. Vicks Poon Kwok-kwong, vice-president and head of investment strategy and research at Citibank, said he believed the stock market would move in the opposite direction to the US dollar in the next 12 months, with a weaker greenback ushering more international hot money into Hong Kong. 'There are of course other factors affecting the stock market, but the inverse correlation between the US dollar and the Hang Seng Index has been particularly strong in the past six months,' Mr Poon said. As the greenback weakens, there will be less upward pressure on the Hong Kong interbank offered rate (Hibor), causing its margin against US dollar interest rates to widen. Mr Poon said the widening between the Hibor and the London interbank offered rate had a direct relation to the Hang Seng Index. Yet he said hot money would play a minimal role in the long-term market outlook. 'There is speculative money flowing in and out of the region every day and the current situation is not worrying at all,' he said. 'For long-term investors there really is no point looking at the aggregate balance's daily volatility. 'With the strong economic fundamentals in Hong Kong and the Asia-Pacific, international capital will continue to stay in the region.' He believed the downturn in the stock market in the past three days was only part of the adjustment period the market had to go through before it rebounded in the second quarter. Despite his upbeat outlook for the market, Mr Poon said the Hang Seng Index would move within a larger range this year - between 3,500 points and 4,000 points - compared with last year's almost 3,000-point range. While stressing the importance of the US dollar's movement, he said measures by the central government to revalue the yuan would be an expected development that would carry more political than economic significance. Meanwhile, Baring Asset Management's head of asset allocation, Percival Stanion, predicted the yuan would be revalued by 2 per cent to 3 per cent this year, perhaps within the next six months. Nevertheless, he dismissed the significance of the revaluation's magnitude, saying that showing the world that the central government had taken its first step towards floating the yuan would be more important. '[The liberalisation of the yuan] will be a multi-year programme,' Mr Stanion said. 'I believe the mainland government will take a pragmatic approach and will avoid disrupting the market with any drastic changes.' While an eventual revaluation appears inevitable, its timing would likely involve heavy political considerations, as further pressure from overseas governments could prove counter-effective. 'One thing we can be certain of is that the mainland government won't just do it when there are strong external pressures,' Mr Stanion said. Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong suggested in his weekly column that the yuan could become the dominant currency for world trade in place of the US dollar in future, given the structural problems in the US economy and the mainland's growing importance as a trading partner with many of the leading economies.