Forex Blog: Currency Trading News & Analysis.

May 19th 2005

Hong Kong liberalizes currency

The Hong Kong Dollar is similar to the Chinese Yuan, in that both are effectively pegged to the dollar. Many speculators suspect a more profound relationship between the two currencies, and have begun using the HKD as a vehicle for betting on the Yuan’s revaluation, because the HKD is more convertible than the Yuan. The massive inflow of ‘hot money’ in Hong Kong is driving down interest rates and causing putative bubbles to form in various asset markets. In a move designed to thwart the efforts of speculators, Hong Kong has announced that it will float the HKD. Sort of. Currently, the HKD is allowed to trade within a tight band, much like the Yuan. Hong Kong banking officials have decided to raise the upper limit on the band, while leaving the lower band fixed. Hong Kong simply wants to remind speculators that betting on the Yuan’s revaluation is not a sure thing. However, this move is more symbolic than anything, as the HKD is unlikely to appreciate against the USD. The Financial Times reports:

While the move does re-introduce an element of downside risk…this decision could simply herald increased speculation as the market tests the limits of the new trading band. “This is a trial balloon. What is happening in Hong Kong is not separate and distinct from China’s programme of moving towards greater flexibility,” said a senior currency strategist.

Read More: Hong Kong moves to deter speculation on its currency

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Posted by Adam Kritzer | in Exotic Currencies | No Comments »

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