Hong Kong steps into money markets to defend local dollar

Hong Kong steps into money markets to defend local dollar

Hong Kong (China) (AFP) – Hong Kong’s de facto central bank stepped in to prop up the local dollar Friday, as the city’s currency hovered around its lowest level in 33 years.

The Hong Kong Monetary Authority (HKMA) spent US$415 million to support the unit as it touched the bottom end of its permitted HK$7.75-7.85 band for the first time since the range was introduced in 2005.

The authority’s deputy chief executive Howard Lee told reporters there could be more interventions to defend the decades-old peg.

“On days when the demand for selling Hong Kong dollar is stronger, when the market cannot fully absorb such selling orders, we would see further occasions of banks asking the HKMA to buy Hong Kong dollar from them,” Lee said Friday.

He added the process of normalising interest rates is expected to be “gradual… to provide a condition for the city’s interest rate to move closer to that of the US”.

Under the city’s Linked Exchange Rate System, the authority is required to buy the local currency at HK$7.85 to US$1 if local banks request it.

Hong Kong’s authorities are “well-prepared” for this situation with the city’s “large foreign exchange reserve and large fiscal reserve” along with liquidity in the banking system, said Young Sun Kwon, an economist at Nomura.

They are also eager to control the size of the intervention and avert a spike in the Hong Kong Interbank Offered Rate, or Hibor — which would in turn translate into local mortgage rates, said Iris Pang, an economist at ING.

“Nowadays there are many new buyers of properties in Hong Kong with mortgages, and the housing price is high… if the Hibor rate increases a lot, it would not only push up the Hibor-linked mortgage rate but could also push up the prime rate” and increase the mortgage burden, Pang said.

The Hong Kong dollar was linked to the greenback in 1983 in a bid to prevent a sell-off as it wobbled over fears about China’s reunification talks with Britain.

It has since served to maintain stability for the currency, in the face of numerous challenges, but is criticised by some people as leaving the territory at the mercy of Federal Reserve policymakers.

The HKMA has been forced to intervene to protect the peg on several occasions.

Among the biggest was in July and August 2014 when it stepped in 24 times, injecting a total of US$9.7 billion into the financial system as the local dollar surged against the US unit owing to a flood of cash seeking access to China’s booming market.

But the Hong Kong dollar has been falling in recent weeks as rising Fed rates have seen investors head to the US for better returns, while trade tensions have escalated between China and the United States, the world’s biggest economies and key drivers of global growth.

— Bloomberg News contributed to this report —