vested
Some betting on end to HK-US dollar link
by Andrew Wong Wai-hong
The Hong Kong dollar had its biggest drop in 10 years last week, amid talk the market is betting on an end to the US dollar link.
After surviving the Asian financial crisis, SARS and the financial tsunami, will the link still end in an environment during which the yuan is fluctuating with China's economy not promising?
If that happens, it must have something to do with the yuan. But another more likely possibility is that the Hong Kong dollar is to some extent equivalent to the US dollar.
So at times when there is a flight to the US dollar as a safe haven, demand for Hong Kong dollars will naturally increase.
Such a situation appeared from August to September due to China's stock volatility.
The market even bet the yuan would be devalued, so at the end of the third quarter and beginning of the fourth, the Hong Kong Monetary Authority intervened more often, even if the "flow" of those funds did not stimulate Hong Kong dollar assets.
But with the People's Bank of China intervening, the market believes there is limited space for the yuan to weaken, and coupled with US interest rates rising, some of the money is flying out.
In the short term, the US dollar may peak and that may require some investors to unwind and buy yen and euro.
But there is certainly a minority betting on the end of the currency link, so even if the US dollar rises to HK$7.85 in the short term and the HKMA intervenes, it doesn't mean the SAR dollar will be hit.
The impact it can have on the financial market in Hong Kong is very limited.
Source: The Standard