Hong Kong sees no need to change the currency system tied to the US dollar, Reuters writes
HONG KONG/SHANGHAI (Reuters) – Hong Kong has no intention and sees no need to change the system that ties the city’s currency closely to the U.S. dollar and has the ability to defend itself, Hong Kong’s de facto chief executive said on Thursday.
Eddie Yue made the comments amid a recent rally in the Hong Kong dollar, which rose to a 3-1/2-year high against the U.S. currency last week, not far from testing a strong part of the system’s trading belt.
Under the Hong Kong Linked Exchange Rate System (LERS), the financial center’s currency is limited to a range between US$7.75 and US$7.85, with the Hong Kong Monetary Authority (HKMA) committed to intervening to maintain the range.
“Despite the recent interest in the LERS and even speculation about potential geopolitical shocks, the Hong Kong dollar market continued to operate smoothly in accordance with the design of the LERS,” Yue said in a statement posted on the HKMA’s website.
“And to repeat, we have no intention and see no need to change LERS.”
The financial hub has substantial foreign exchange reserves of over $420 billion, roughly 1.7 times its monetary base, which Yue says is meant to “ensure the smooth functioning of LERS at all times.”
A range of factors, including seasonal funding shortfalls, buying by mainland Chinese investors and rising dividend payouts by listed companies contributed to tight liquidity in Hong Kong and supported the currency, traders and analysts said.
Yue said the HKMA is closely following discussions on the exchange rate system, which has weathered numerous economic cycles and multiple financial crises.
“As a small, open economy and a major international financial center, exchange rate stability is crucial for Hong Kong,” Yue said, rejecting the view that strengthening the Hong Kong dollar against the dollar would hinder the city’s economic recovery.
Analysts in Barclays (LON: ) expect the Hong Kong dollar to remain near 7.75 to the dollar in January, but expect it to weaken later.
“We think global factors are likely to keep sentiment subdued and supportive, especially after the positive momentum from dividend payouts by HK-listed companies and (as) IPO activity fades,” they said in a note published this week.
“Onshore buying of Hong Kong stocks could continue due to the lack of better investment alternatives, but more foreign participants would be needed to buy Hong Kong stocks to keep demand for the HKD elevated more permanently.”
