Hong Kong’s Monetary Authority (HKMA) has intervened in the currency markets for the third time in less than a week, selling a total of HK$6.63bn (US$855m) to halt the rise of the Hong Kong dollar against the US dollar.
The mechanisms that govern Hong Kong’s currency board, by which the Hong Kong dollar’s exchange rate is linked to the US dollar, mean that the central bank must buy US dollars when the Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75.
In an attempt to halt appreciation of the local currency after it hit HK$7.75, the lower limit of its trading band to the U.S. dollar. The HKMA started selling Hong Kong dollars in the foreign exchange markets on October 19 2012. This was the first of such a move, the central bank had made since December 2009.
The link of the Hong Kong dollar to the US dollar was put in place in 1983 when negotiations about the future of the British colony after 1997 had sparked nervousness in the local business community.
In 2005 Hong Kong committed to keep the exchange rate between HK$7.75 and HK$7.85. The link has given Hong Kong companies stability in commercial contracts while tethering monetary policy to that of the U.S., where borrowing costs are being held down to spur hiring and prop up the housing market. Hong Kong’s jobless rate is near a four-year low and home prices are at all-time highs, as Bloomberg reports.
Property prices in Hong Kong are among the highest in the world as local and mainland Chinese investors have rushed to buy apartments in the city as a hedge against inflation.
‘The city had $301.2 billion of foreign-exchange reserves as of the end of September, amounting to about eight times the currency in circulation. The holdings grew 8.5 percent in the past year’, Bloomberg reports.
According to Bloomberg, the analysts said that the strong inflow of money into Asian currencies and stock markets has been prompted by increasing investor appetite for emerging markets as they sought better returns. In a recent note to clients, HSBC said that the more “equity-oriented” currencies such as the Indian rupee, the Korean won and the Taiwanese dollar had outperformed as money had flowed into local stock markets.
The recent strength in the Hong Kong dollar against the US dollar was in line with other Asian currencies because the US. Federal Reserve’s quantitative easing measures had also weakened its own currency. Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong, said to Bloomberg by telephone that “there could be more intervention” in Hong Kong.
According to the Financial Times, over the past couple of years, the fact that the dollar peg allows the local central bank little latitude to curb asset price inflation in the city through raising interest rates, for example, has led to calls from HKMA’s previous Chief Executive Joseph Yam, to reconsider the currency mechanism. ANZ said that it remained confident that the system would stay in place for the foreseeable future. “The intervention suggests that the HKMA will continue to defend the HKD peg,” it said. “The currency reserve is sufficiently strong to defend against not only normal capital flow but also speculative pressure . . . The HKMA intervention and recent strength of the HKD will probably be temporary and successful.”
Government officials, however, have stressed that the linked exchange rate serves the city well by giving the financial centre the stability it needs. The lack of convertibility of the Chinese renminbi also makes it an unlikely currency for the Hong Kong dollar to be linked to despite the strong economic ties between China and Hong Kong.
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Stuart Yeomans 
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