Author`s name Dmitry Sudakov

Hong Kong gets involved in currency wars

Special Administrative Region of China, Hong Kong, is now involved in the currency wars that take place around the world. Last week, the Hong Kong Monetary Authority (HKMA) conducted currency interventions, having sold its own currency in the amount of 603 million U.S. dollars in just one hour to stabilize the exchange rate of the Hong Kong currency against the U.S. dollar.

The measure was taken after the exchange rate of the Hong Kong dollar against the U.S. dollar fell below $7.75 per U.S. dollar, dropping to the level of 7.7367 during the trading session.

Currency wars were widely discussed last year, when central banks of several countries at once started taking active measures to prevent the growth of the rate of their currencies to maintain the competitiveness of their economies. Last year, the Swiss National Bank began to carry out foreign exchange interventions to prevent the strengthening of the franc. Japan's Ministry of Finance has had to sell the yen massively several times over the past couple of years.

Experts believe that the export-oriented South Korean economy takes similar measures towards its currency - the won. This is the first currency intervention of the HKMA since December 2009, Bloomberg said. During that time, the department would frequently interfere in the course of trade, adjusting the rate of its currency to avoid excessive strengthening.

The Hong Kong dollar is actively bought and sold only in Asia. One may say that this currency does not pose much interest to speculators. This currency is not traded freely. The rate of the currency is monitored by the Hong Kong Monetary Authority that defines the policy as the regime of consistent exchange rate. The Hong Kong dollar is tied to the U.S. counterpart, and there is a very narrow range for fluctuations. Since 1983, the Hong Kong dollar has had a strong U.S. dollar peg at the rate of 7.8 Chinese currency units per one American dollar.

In 2005, the currency range was set on the level from 7.85 Hong Kong dollars to the maximum rate of 7.75 per one U.S. dollar. A drop below this mark on October 19 this year, made the HKMA throw own currency on the market worth $600 million USD to restore the limits of the claimed rate corridor. The reason for such a sharp strengthening of the Hong Kong dollar was the complicated situation in the euro zone, as well as injections of liquidity on the part of central banks of the world.

Thus, on September 13th, the U.S. Federal Reserve announced the third phase of quantitative easing, i.e. the stimulation of the U.S. economy through additional emission. The FR announced that it would buy mortgage bonds in the amount of $40 billion every month. In September, the European Central Bank also announced a program to buy up the government debts of troubled countries. The Bank of Japan increased its program of buying assets by $126 billion.

These measures boost the devaluation of the above-mentioned currencies, which led to the growth of the rate cost of the Hong Kong dollar. As a matter of fact, it was the dollar devaluation that triggered it all.

"No matter what kind of European currency we take - the yen, the yuan, the Swiss franc and even the Israeli shekel with the Czech crown, we will see the dollar decline in any of these currency pairs during the recent years. The devaluation of the basic reserve currency of the world is seen best in the situation with precious metals - gold, for example, which, still serves as a settlement asset on the interbank market. Starting with September 2008, the dollar has lost 115 percent vs. gold! The growth of such currencies as the Hong Kong dollar, the Australian and Canadian dollar to the U.S. dollar is not so significant," leading analyst of Kalita-Finance Alexey Vyazovsky said.

In addition, on October 18th, the Chinese yuan rose to the highest level in 19 years and reached 6.2446 yuan per U.S. dollar. The very next day, the Hong Kong dollar surged, which may indicate investors' increasing interest in the Chinese economy on the whole.

Judging by the fact that the Chinese economy has stabilized, investors are hopeful that it will recover. The funds from Europe and the U.S. flock to Hong Kong to buy the stocks associated with China, Bloomberg said.

Anatoly Miranovsky


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