Strong HK$ curtailed by HKMA

The Hong Kong Monetary Authority yesterday sold $603 million worth of Hong Kong dollars in the foreign exchange market.

HKMA took action when the U.S. dollar hit HK$7.75, the lower limit of the trading band in which the U.S. dollar is allowed to trade against the local currency.

Hong Kong allows its dollar to trade in a narrow range between HK$7.75 and HK$7.85. When it reaches the strong end of the permitted trading range, HKMA offers to buy U.S. dollars to prevent further appreciation. This linked exchange rate, which continues to receive much criticism, was adopted in 1983 when negotiations between China and the U.K. over the city’s shift to Chinese control cause massive capital outflows.

HKMA said demand for the HK$ strengthened due to the weakness of the US dollar and a stabilization of European markets. Both events triggered capital inflows to the HK$, other Asian currencies and stocks.

It said the Hong Kong dollar market has been stable and orderly recently. It noted that the Hong Kong dollar’s exchange rate has been trading close to the strong side of the convertibility zone recently due to market demand for the Hong Kong dollar.