The Hong Kong Monetary Authority (HKMA) intervened in the currency market for the first time since December 2009 by injecting Hong Kong dollars into the market over the weekend, in a move to prevent the currency from gaining further against the US dollar.
The HKMA sold $603 million worth of Hong Kong dollars at the strong-side of the trading band of HK$7.75 to the US dollar, Reuters reported Saturday.
"The recent increase in demand for the local currency is related to a less strained European market, weakness in the US dollar and declining US interest rates, which have prompted capital inflows into currency and equity markets in the region," an HKMA spokesman was quoted by Reuters as saying.
The Global Times' telephone and e-mail inquiries to the HKMA were not returned by press time.
"The move was triggered by the recent appreciation of the Hong Kong dollar against the US dollar," Zhao Xijun, deputy dean of the School of Finance at Renmin University of China, told the Global Times Sunday.
The Hong Kong dollar hit HK$7.75 against the US dollar on Friday.
Hong Kong implemented a linked exchange rate system in 1983, pegging the Hong Kong dollar to the US dollar at HK$7.8. It can be traded in a range between HK$7.75 and HK$7.85 to the US dollar.
When the Hong Kong dollar reaches the strong-side of the trading range, the HKMA is obligated to intervene by selling Hong Kong dollars and buying US dollars to stop the currency from rising beyond the HK$7.75 limit.
"China's economy has been gradually stabilizing as evidenced by improved trade data in September, attracting capital into the Asian market," Zhao said.
"The US' third round of quantitative easing injected more capital into the market. The excess capital flows to the market with the best economic prospects," he said.
The US Federal Reserve launched the third round of quantitative easing, known as QE3, in September, pumping $40 billion per month into the money market to boost the country's economy.
"With Hong Kong's stock market continuing to improve in recent weeks and the global market more optimistic about China's economy, part of this new capital is entering the Hong Kong market," Lu Ting, a China economist with Bank of America Merrill Lynch, told the Global Times Sunday.
"The US dollar continues to weaken against the Hong Kong dollar. It is possible that the HKMA may intervene again in the foreign exchange market in the near future," he said.
