HKMA steps in to depreciate Hong Kong dollars

Since the investors begin to have confidence on the global economy, "hot money" kept flow into Hong Kong and lead to Hong Kong dollars appreciated. Hong Kong Monetary Authority ("HKMA") intervened seven times in two weeks to weaken the Hong Kong dollars. HKMA sold HK$2.3 billion on 1 November because Hong Kong dollars repeatedly touched the upper limit of the Linked Exchange Rate System.

The Linked Exchange Rate System had been adopted since 1983. Under this system, the Hong Kong dollar is pegged at HK$7.80 to one US dollar. In 2005, the allowed range of exchange rates was set to be 7.75 to 7.85. HKMA has to intervene to buy/sell Hong Kong dollars to keep the exchange rate of Hong Kong dollars in the predetermined range, when the exchange rate of Hong Kong dollars appreciate/ depreciate to the upper/lower limit.

HKMA expects that net inflows of Hong Kong dollars will persist for a period because investors keep seeking investment opportunities in Hong Kong and the Mainland China. In addition, HKMA added that the U.S. Federal Reserve's launch of the third round of quantitative easing has made the demand for Hong Kong dollars increase, and other currencies within the region are noted with similar increase in demand. HKMA will pay attention to the exchange rate and make effort in stabilise the value of Hong Kong dollars.

The Linked Exchange Rate System makes the exchange rate of Hong Kong dollars stable. However, the system makes Hong Kong lose its independence in monetary policy. Hong Kong's monetary policy is forced to follow the monetary policy of United States, instead of being adjusted in accordance with economic environment of Hong Kong. We need to observe the global economic development and decide whether the Linked Exchange Rate System should be changed accordingly.