Hong Kong Takes Action to Weaken Its Dollar (Oct 2012)


WSJ: Hong Kong Takes Action to Weaken Its Dollar

Notable Excerpts:

After weeks of capital inflows from abroad that have pushed up the value of the Hong Kong dollar to the top of its trading band, the city’s de facto central bank was forced to intervene Friday and weaken the local currency for the first time in nearly three years.

Property prices are up because land is scarce! Wrong!

The U.S. Federal Reserve’s latest round of stimulus measures and the European Central Bank’s recent pledge to buy sovereign bonds has restored global investor confidence and led money managers to buy a wide range of assets around the world, including in Hong Kong.

Oh, the stock market is up! We are in a recovery! Wrong!

The influx of money has pushed up the Hang Seng Index—the benchmark of local shares that is closely tied to the fortunes of China—to a six-month high, making it one of Asia’s best performers in 2012.

The Hong Kong Monetary Authority sold 4.67 billion Hong Kong dollars (US$602.6 million) in the foreign-exchange market…

The HKMA undertakes to buy or sell the local unit whenever it touches either side of the band that ranges from HK$7.75 to HK$7.85.

Hong Kong’s intervention comes as other central banks in the region also have sought to stop their currencies from strengthening further to help keep their exports competitively priced. The Bank of Japan has recently threatened to slow the yen’s appreciation, while the Bank of Korea is suspected of curbing the won’s rally.

Hong Kong’s linked exchange-rate regime was established in 1983, partly to defend the currency from panic selling amid escalating concerns about the former British colony’s future, ahead of its handover to China in 1997.

Property prices are up because land is scarce! Wrong!

The peg bolts Hong Kong’s monetary policy to that of the U.S., meaning the city has had ultralow interest rates recently, spurring rising property prices because money is cheap to borrow for real-estate purchases.

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