Hong Kong dollar dropped to the lowest level in four year on Thursday trading. This week's drop may suggest the biggest loss in a week for more than a decade.
According to Reuters concerns of capital outflows and possible increase of interest rate have dropped Hong Kong dollar to the lowest level against the U.S. dollar in four years on Thursday. While shares in Han Seng index also fell led by property shares. China stock also dropped on Friday morning as investors continued to reduce equity exposure with weaker-than-expected loan data.
Hong Kong Financial Secretary John Tsang Chun-wah also said on Friday that Hong Kong dollar may weaken amid expectations of more capital outflow from the city. He told South China Morning Post, 'It is possible that the Hong Kong dollar may go to a weaker level to reach the weak end of the peg."
"Since there was a lot of capital flow in the Hong Kong markets earlier, it is natural this money would leave the market at some stage. The government will closely monitor the market situation."
On Friday, Bloomberg reported that Hong Kong dollar was heading for its biggest weekly loss since 2003. The continuous plunge occurred because of speculation about the state of China's economy. Hong Kong dollar was down 0.25% at HK$7.7825 after a 0.29% drop on the previous day that marked the steepest loss in 12 years.
Although the existing exchange-rate system limits declines to HK$7.85 and caps gains at HK$7.75, but there is high possibilty the currency to drop to the weaker side of the peg. Bloomberg data shows that option prices indicating a 28% chance the Hong Kong dollar to weaken beyond its current trading range this year.
However, according to Andi Ji a foreign exchange strategist for Commonwealth Bank of Australia, Hong Kong authority may have moved to stabilize the currency. He said, "We suspect that there was intervention from the Hong Kong Monetary Authority." he said in Singapore because, "They're trying to instill confidence."
Hong Kong Monetary Authority (HKMA) have not responded to question regarding whether they intervene the market or not. However HKMA needs confidence in Hong Kong dollar, so that the HKMA can continue to implement its exchange rate system. According to a spokeperson on Thursday, the linked-exhange-rate system has served Hong Kong well, therefore she said, "We see no need and have no intention to change the system."
Hong Kong uses linked-exchange-rate system framework to maintain exchange rate stability. Although the steep dropped is due to the global economy slowdown, but it requires extra attention from HKMA to maintain its strong fundamental economy in fiscal and banking system.
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