GRG55
10-25-07, 02:51 AM
From the FT. Going to be interesting to see how long HK can hold the peg with the yuan appreciating and continually strengthening economic ties with mainland China. One would think the inflation rate in HK must already be pretty high.
HK dollar tests limit of trading band
By Peter Garnham
Published: October 24 2007 03:00 | Last updated: October 24 2007 03:00
The Hong Kong dollar yesterday hit the upper end of its trading band for the first time, prompting the Hong Kong Monetary Authority to refute speculation that it would abandon its peg against the US dollar.
The territory's currency, which has been boosted by continuing fund flows into the Hong Kong stock market, rose to HK$7.7500 against the dollar for the first time since its trading band was set in May 2005.
The Hong Kong dollar is pegged at HK$7.8 against the dollar, but since May 2005 has been allowed to trade between HK$7.75 and HK$7.85.
Under the exchange rate mechanism, the HKMA is committed to buy US dollars from licensed banks in exchange for Hong Kong dollars if the exchange rate hits HK$7.75.
Analysts said speculation had been increasing that the HKMA might ditch its peg against the dollar, or allow its currency to trade in a wider band, since a strengthening Chinese renminbi and a weakening US dollar were making the territory's imports more expensive.
China, which manages the renminbi in a controlled float against the dollar, has been under continued pressure from Europe and the US to let its currency appreciate faster. Hank Paulson, US Treasury Secretary, repeated those calls yesterday, saying the renminbi had to rise in value more rapidly to heighten the prospects for more balanced growth in
China and the global economy.
Interbank lending rates in Hong Kong have risen to a six-year high amid increased demand for Hong Kong dollars to fund investment in new listings on the territory's stock market and increased tightness in the local lending market caused by the recent credit squeeze.
The HKMA moved quickly to intervene in defence of the trading band yesterday and played down speculation that it was set to change its currency policy.
"The government is fully committed to the maintenance of the linked exchange rate system and there is no intention to introduce any changes to this system," an HKMA spokesman said.
David Woo, at Barclays Capital, said he viewed the risk of the HKMA ending the peg to the dollar as very low.
Mr Woo said that given the peg had held up against intense market pressures before, such as the 1997 Asian financial crisis, the Sars outbreak and the revaluation of the Chinese renminbi, it was unlikely to be altered as a result of a short-term rise in market inflows.
"The Hong Kong dollar peg has provided stability to the island's economy and has worked well since 1983," said Mr Woo.
Marc Chandler, at Brown Brothers Harriman, said investors were likely to make more money by betting with the HKMA than against it.
"The HKMA has unlimited resources to defend the stronger end of the band," he said. "We think the peg will remain in place for the foreseeable future and only be adjusted when the Chinese renminbi is fully convertible, an event that is likely years away."
By late afternoon in Asia, the Hong Kong dollar had weakened to stand at HK7.7510 against the dollar.
Copyright (http://www.ft.com/servicestools/help/copyright) The Financial Times Limited 2007
Link:
http://www.ft.com/cms/s/0/5a2f7142-81cc-11dc-9b6f-0000779fd2ac.html
HK dollar tests limit of trading band
By Peter Garnham
Published: October 24 2007 03:00 | Last updated: October 24 2007 03:00
The Hong Kong dollar yesterday hit the upper end of its trading band for the first time, prompting the Hong Kong Monetary Authority to refute speculation that it would abandon its peg against the US dollar.
The territory's currency, which has been boosted by continuing fund flows into the Hong Kong stock market, rose to HK$7.7500 against the dollar for the first time since its trading band was set in May 2005.
The Hong Kong dollar is pegged at HK$7.8 against the dollar, but since May 2005 has been allowed to trade between HK$7.75 and HK$7.85.
Under the exchange rate mechanism, the HKMA is committed to buy US dollars from licensed banks in exchange for Hong Kong dollars if the exchange rate hits HK$7.75.
Analysts said speculation had been increasing that the HKMA might ditch its peg against the dollar, or allow its currency to trade in a wider band, since a strengthening Chinese renminbi and a weakening US dollar were making the territory's imports more expensive.
China, which manages the renminbi in a controlled float against the dollar, has been under continued pressure from Europe and the US to let its currency appreciate faster. Hank Paulson, US Treasury Secretary, repeated those calls yesterday, saying the renminbi had to rise in value more rapidly to heighten the prospects for more balanced growth in
China and the global economy.
Interbank lending rates in Hong Kong have risen to a six-year high amid increased demand for Hong Kong dollars to fund investment in new listings on the territory's stock market and increased tightness in the local lending market caused by the recent credit squeeze.
The HKMA moved quickly to intervene in defence of the trading band yesterday and played down speculation that it was set to change its currency policy.
"The government is fully committed to the maintenance of the linked exchange rate system and there is no intention to introduce any changes to this system," an HKMA spokesman said.
David Woo, at Barclays Capital, said he viewed the risk of the HKMA ending the peg to the dollar as very low.
Mr Woo said that given the peg had held up against intense market pressures before, such as the 1997 Asian financial crisis, the Sars outbreak and the revaluation of the Chinese renminbi, it was unlikely to be altered as a result of a short-term rise in market inflows.
"The Hong Kong dollar peg has provided stability to the island's economy and has worked well since 1983," said Mr Woo.
Marc Chandler, at Brown Brothers Harriman, said investors were likely to make more money by betting with the HKMA than against it.
"The HKMA has unlimited resources to defend the stronger end of the band," he said. "We think the peg will remain in place for the foreseeable future and only be adjusted when the Chinese renminbi is fully convertible, an event that is likely years away."
By late afternoon in Asia, the Hong Kong dollar had weakened to stand at HK7.7510 against the dollar.
Copyright (http://www.ft.com/servicestools/help/copyright) The Financial Times Limited 2007
Link:
http://www.ft.com/cms/s/0/5a2f7142-81cc-11dc-9b6f-0000779fd2ac.html