Hong Kong Weakens Its Dollar (HKD) to Maintain Price Cap

on Oct 22, 2012

**Hong Kong Buys $603 Million in First Peg Intervention Since 2009**

After weeks of capital inflows from abroad that have pushed up the value of the Hong Kong dollar (HKD) to the top of its trading band of HK$7.75, the city’s de facto central bank was forced to intervene on Saturday and weaken the local currency, Reuters reported on 20 October 2012.
The Hong Kong Monetary Authority (HKMA) sold $603 million worth of Hong Kong dollars (HKD) at the strong side of the trading range of HK$7.75 to a US dollar, in a move that will lift its aggregate balance — the sum of balances on clearing accounts maintained by banks with the authority — to HK$153.3 billion .

This is the first time in almost three years the HKMA had intervened in the foreign exchange market to balance the massive capital inflow that Hong Kong has recently received. The last time the HKMA made a move to curb its currency and maintain price cap was in 2009 at the height of the global financial crisis.
**Increasing Demand for HKD**
!m[Hong Kong Monetary Authority Intervenes in Forex Market for First Time in Three Years](/uploads/story/619/thumbs/pic1_inline.png)The Hong Kong dollar has been strengthening and trading close to the strong side of its trading band since mid-October. Traders and analysts attribute this to robust demand for the local unit. Because of its status as a Chinese financial hub with its own currency and legal system, foreign investors generally consider Hong Kong as a gateway to mainland China and the yuan (CNY) which is not a freely tradable currency. Investment from people — including wealthy Chinese — fleeing the Eurozone debt crisis and weak US economy have recently parked themselves in Hong Kong, which in result has seen its stocks and property market surge in value.

A HKMA spokesman said in a statement: “The recent increase in demand for the local currency is related to a less strained European market, weakness in the US dollar and declining US interest rates, which have prompted capital inflows into currency and equity markets in the region.”
**HKMA Intervention Following Moves by Region’s Central Banks**

The Hong Kong dollar has been pegged to the US dollar at between HK$7.75 and HK$7.85 since 2005, a revamped version of the 29-year-old peg. The Hong Kong Monetary Authority is obliged to act by buying or selling the local unit whenever it touches either side of the band. And although the city’s position is different from countries in the region, the HKMA move is similar to measures taken by other relative authorities in recent times.
Most Asian central banks have sought to stop their currencies from strengthening further to help keep their exports competitively priced. Except for Singapore, almost all other central banks including the Bank of Japan and Bank of Korea have stepped in to reduce the value of their currencies.