Hong Kong Spends $202 Million to Defend Currency Peg

Hong Kong reduced its foreign exchange reserves for the first time in three years to protect its longstanding dollar exchange rate, which acted as a cushion for the local currency against the strong greenback.

The Chinese territory’s de facto central bank, the Hong Kong Monetary Authority, on Thursday said it sold US dollars to buy HK$1.586 billion, or about $202 million.

The money regulator said the move was made during New York trading hours on Wednesday. It has taken action to stop trading the local currency beyond the weak level of the allowed range of HK$7.75 to US$7.85 per US dollar.

The Hong Kong dollar has been pegged to the US par since 1983, helping to cement the city’s emergence as one of the world’s major financial centres. The monetary authority is ready to sell US dollars if the local currency is too weak or buy them if the Hong Kong dollar becomes too strong.

In recent years, some investors and analysts have questioned the durability of the system as Beijing tightens its grip on Hong Kong, US-China tensions rise and China seeks to increase the use of world renminbi.

However, city authorities have emphasized their commitment to price anchoring. Many market participants say the setup, also known as the Linked Exchange Rate System or LERS, is powerful and still useful for China.

“LERS has continued to perform well, having weathered multiple economic cycles in its nearly four decades of performance,” the money regulator said in a statement. “We will continue to closely monitor market conditions to maintain monetary and financial stability.”

The US dollar has surged this year as the Federal Reserve started raising interest rates and the war in Ukraine has boosted demand for safer assets. On Wednesday, the WSJ Dollar Index hit 96.51, its highest closing value since March 2020.

Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets, said global investors have reduced their holdings of assets in Hong Kong, amid the pandemic’s deceleration in Hong Kong. and mainland China and a sweeping crackdown on Chinese technology companies.

At the same time, the Fed’s actions and inflation concerns are pushing up short- and long-term yields in the US. “That’s enough to get money out of Hong Kong,” Lai said.

The currency regulator’s purchase of Hong Kong dollars would remove liquidity from the local financial system, helping to push up borrowing costs. Year-to-date, short-term interest rates in the interbank lending market have risen more slowly than those in the US, reducing the relative attractiveness of the Hong Kong dollar.

Hong Kong last supported the currency in March 2019, as a cash surplus weighed on the city’s short-term interest rates. The following year, the currency rallied to a lower band of HK$7.75/dollar, as the Fed’s easy money policies boosted demand for high-yielding international assets. than. HKMA sold Hong Kong dollars in October 2020.

The linked exchange rate system is well-tested, analysts say, and is unlikely to be broken anytime soon. “We’ve been in this competition before,” said Paul Mackel, global head of forex research at HSBC.

Write letter for Dave Sebastian at dave.sebastian@wsj.com

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Appeared on 12 May 2022, print edition as ‘Hong Kong Moves To Currency Appreciation.’

https://www.wsj.com/articles/hong-kong-spends-202-million-to-defend-currency-peg-11652326711?mod=rss_markets_main Hong Kong Spends $202 Million to Defend Currency Peg

Edmund DeMarche

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