Hong Kong is spending $722m to defend its currency peg
Hong Kong dipped into its foreign exchange reserves for the first time in three years to defend its long-standing dollar peg, acting to support the local currency against a rising greenback.
China’s de facto central bank, the Hong Kong Monetary Authority, said on Thursday it had acted twice to halt trading in the local currency beyond the low end of its authorized range of 7, 75 to 7.85 Hong Kong dollars for one US dollar.
The monetary authority said it sold U.S. dollars to buy 1.586 billion Hong Kong dollars, the equivalent of about $202 million, during New York trading hours on Wednesday. It later said it sold another $520 million on Hong Kong Day on Thursday.
The Hong Kong dollar has been pegged to its US equivalent since 1983, helping the city emerge as one of the world’s leading financial centers. The monetary authority is ready to sell US dollars if the local currency becomes too weak or to buy them if the Hong Kong dollar becomes too strong.
In recent years, some investors and analysts have questioned the sustainability of the system as Beijing’s grip on Hong Kong has tightened, US-China tensions have risen and China has sought to strengthen the use international yuan.
However, the city authorities stressed their commitment to the picket line. Many market players say the setup, also known as the Linked Exchange Rate System or LERS, is robust and still useful to China.
“The LERS has continued to perform well, having withstood many economic cycles during its nearly four decades of operation,” the monetary authority said in a statement. “We will continue to closely monitor market situations with a view to maintaining monetary and financial stability.”
The US dollar has appreciated significantly this year as the Federal Reserve began raising interest rates and the war in Ukraine boosted demand for safer assets. On Wednesday, the WSJ Dollar Index hit 96.51, its highest closing value since March 2020.
Global investors have reduced their holdings of Hong Kong assets, amid a pandemic-driven slowdown in Hong Kong and mainland China and a sweeping crackdown on Chinese tech firms, chief economist Kevin Lai said. for Asia excluding Japan at Daiwa Capital Markets.
At the same time, Fed action and inflationary concerns are driving up short-term and long-term yields in the United States. “That’s enough to withdraw money from Hong Kong,” Lai said.
The monetary authority’s purchase of Hong Kong dollars will drain liquidity from the local financial system, helping to drive up borrowing costs. So far this year, short-term interest rates in the interbank lending market have risen more slowly than those in the United States, reducing the relative attractiveness of the Hong Kong dollar.
Hong Kong last acted to support the currency in March 2019 as a glut of liquidity weighed on the city’s short-term interest rates. The following year, the currency surged to the lower range of HK$7.75 to the dollar as the Fed’s easy money policies fueled demand for higher-yielding international assets. The HKMA sold Hong Kong dollars in October 2020.
Analysts said the pegged exchange rate system had been well tested and the peg was unlikely to break any time soon. “We’ve seen this rodeo before,” said Paul Mackel, global head of currency research at HSBC.
Write to Dave Sebastian at [email protected]
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Appeared in the print edition of May 12, 2022 under the title “Hong Kong Moves to Shore Up Currency”.