Hong Kong Moves Again to Protect Its Local Currency (HKD)

Written by: Jane Tindall
October 24, 2012

The Hong Kong Monetary Authority (HKMA) intervened in the foreign exchange market for a second time in a week to curb appreciation after the local currency hit HK$7.75 — its upper trading limit of a 29-year-old peg to the US dollar (USD), The Financial Times reported on 23 October 2012.

**Three Interventions in a Day**
On Tuesday, the HKMA intervened three consecutive times in the currency market. The city’s de facto central bank bought a total of $1.25 billion at a rate of HK$7.75 per US dollar in Hong Kong and New York. The authority announced in consecutive e-mail statements that it first intervened in the forex market by buying $505 million in Hong Kong. Later, the HKMA bought $350 million again in the city, to then finish the day with a further purchase of $395 million in New York.

The Hong Kong’s authority said that the interventions were necessary to “maintain the exchange rate stability” of the Hong Kong dollar (HKD) and that the HKMA will remain closely vigilant of the market developments and act in accordance with the Currency Board mechanism. The city’s de facto central bank statement further explained that its latest move “will result in a corresponding expansion in the banking system’s aggregate balance to HK$163 billion on October 25.”

**Second Move in a Week**
!m[HKMA Makes Three Consecutive Forex Market Interventions in a Day as HKD Tests Limit ](/uploads/story/632/thumbs/pic1_inline.png)The three consecutive moves on Tuesday followed a $603 million intervention on October 19, when the HKMA stepped into the forex market for the first time in three years to balance the massive capital inflow that Hong Kong has recently received. In 2008 and 2009, at the height of the global financial crisis, the city’s authority made multiple interventions to weaken the local currency, as traders moved into the Hong Kong dollar, which was seen as a safe haven. Recently, due to the same reasons, the city’s currency has strengthening again and since mid-October the Hong Kong dollar has been trading close to the upper limit of its trading band.

**Peg Pledge**
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 mechanisms that govern Hong Kong’s currency board mean that the Hong Kong Monetary Authority must buy or sell the local unit when it pushes against either side of the band.
In 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. 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 yuan (CNY) 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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