Hong Kong Spends $202 Million to Defend Currency Peg

[ad_1] Hong Kong dipped into its foreign-exchange reserves for the first time in three years to defend its longstanding dollar peg, acting to shore up the local currency against a surging greenback. The Chinese territory’s de facto central bank, the Hong Kong Monetary Authority, on Thursday said it had sold U.S. dollars to buy 1.586

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Hong Kong dipped into its foreign-exchange reserves for the first time in three years to defend its longstanding dollar peg, acting to shore up the local currency against a surging greenback.

The Chinese territory’s de facto central bank, the Hong Kong Monetary Authority, on Thursday said it had sold U.S. dollars to buy 1.586 billion Hong Kong dollars, or the equivalent of about $202 million.

The move was made during New York trading hours Wednesday, the monetary authority said. It acted to stop the local currency trading beyond the weak end of its permitted range of HK$7.75 to HK$7.85 per U.S. dollar.

The Hong Kong dollar has been tied to its U.S. equivalent since 1983, helping underpin the city’s emergence as one of the world’s major financial centers. The monetary authority stands ready to sell U.S. dollars if the local currency gets too weak, or buy them if the Hong Kong dollar becomes too strong.

In recent years, some investors and analysts have questioned the durability of the system as Beijing’s grip on Hong Kong has tightened, U.S.-China tensions have risen, and China has sought to bolster international usage of the yuan.

However, the city’s authorities have stressed their commitment to the peg. Many market participants say the setup, also known as the Linked Exchange Rate System or LERS, is robust and remains useful to China.

“The LERS has continued to function well, having weathered many economic cycles in its nearly four decades of operation,” the monetary authority said in a statement. “We will continue to closely monitor market situations with a view to maintaining monetary and financial stability.”

The U.S. dollar has gained broadly this year as the Federal Reserve has started to raise interest rates and the war in Ukraine has fostered demand for safer assets. On Wednesday, the WSJ Dollar Index hit 96.51, its highest closing value since March 2020.

Global investors have reduced holdings of Hong Kong assets, amid a pandemic-driven slowdown in Hong Kong and mainland China and a sweeping crackdown on Chinese tech companies, said

Kevin Lai,

chief economist for Asia excluding Japan at Daiwa Capital Markets.

At the same time, Fed action and inflationary concerns are pushing up short- and long-term yields in the U.S. “That is enough to draw money out of Hong Kong,” Mr. Lai said.

The monetary authority’s purchase of Hong Kong dollars will drain liquidity from the local financial system, helping push up borrowing costs. So far this year, short-term interest rates in the interbank lending market have risen more slowly than those in the U.S., reducing the relative appeal of the Hong Kong dollar.

Hong Kong last acted to support the currency in March 2019, as a glut of cash weighed on the city’s short-term interest rates. The following year, the currency surged toward the lower band of HK$7.75 per dollar, as the Fed’s easy-money policies fueled demand for higher-yielding international assets. The HKMA sold Hong Kong dollars in October 2020.

Analysts said the linked-exchange rate system was well-tested and the peg was unlikely to break anytime soon. “We’ve been to this rodeo before,” said Paul Mackel, global head of foreign-exchange research at HSBC.

Write to Dave Sebastian at dave.sebastian@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the May 12, 2022, print edition as ‘Hong Kong Moves to Shore Up Currency.’

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