HK will uphold currency peg

HK will uphold currency peg

Monetary Authority Chief Executive Joseph Yam has refuted reports that Hong Kong officials lobbied Mainland authorities to allow changes to the way the Hong Kong dollar is linked to the US dollar. Mr Yam said today the Government is determined to defend the currency peg. The HK dollar has been the object of speculative activity in the last three days. The authority injected HK dollars into the market yesterday to purchase US$1 billion as the HK dollar exchange rate persistently hit HK$7.75 to the US dollar, the upper limit of the trading band. The injection will bring the HK dollar balance in the banking system to $10.6 billion after tomorrow's settlement, Mr Yam said. Noting the action will make interbank rates fall, he believed local banks will lower their interest rate following the US Federal Reserve's rate cut. Matter of judgement In his Viewpoint column published today on the authority's website, Mr Yam said it is a matter of judgement for the authority whether or not there is a need to take action within the Convertibility Zone. He said Hong Kong has in the past seen periods in which the exchange rate was stronger than 7.8 but there was a significant interest-rate premium for the Hong Kong dollar over the US dollar. Conversely, there were periods in which the exchange rate was weaker than 7.8 but there was a significant interest-rate discount. "Such anomalies may be quite temporary and the market may adjust, without the need for us to take action. But they may be quite persistent, to the extent of creating the possibility of sharp interest-rate adjustments when the Convertibility Undertaking is eventually triggered, causing similarly sharp and possibly destabilising reactions in financial markets. "There may therefore be a case for action within the Convertibility Zone to normalise the relationship between the exchange rate and interest rates so as to minimise the possibility of abrupt adjustments in the latter." Currency peg working well Mr Yam said it may be that the strong-side Convertibility Undertaking will further be triggered, requiring the authority to buy in more US dollars passively and inject more Hong Kong-dollar liquidity. "Whatever the case, and whether or not action within the Convertibility Zone is taken, the Linked Exchange Rate system has been functioning well to deliver exchange-rate stability. The Government has also reiterated that there is no plan or intention to change the system in any way (such as re-pegging at a different level or widening the Convertibility Zone)."