Apr. 13 (NBD) -- The Hong Kong Monetary Authority (HKMA) issued a statement Thursday saying that it has bought 816 million HK dollars from the market, the first such operation since 2005, as the HK dollar hit the weak end of its trading range against the U.S. dollar.  

At 11am of Friday, the currency was traded at 7.8499 against the U.S. dollar, being in the normal range. 

Reason behind depreciation

In fact, the HK dollar has been declining since the beginning of this year. 

Data shows the HK dollar hovered at around 7.81 against the U.S. dollar in January, but once touched 7.85 Thursday.  

According to analysts, the widening interest margin between the U.S. and Hong Kong was the major reason behind the HK dollar's depreciation. 

Last year, the U.S. raised its benchmark interest rates three times, and in March 2018, the country announced a further increase in interest rate. During the period, a large amount of money from Mainland China flowed to Hong Kong's financial market, hence abundant HK-dollar liquidity. This enlarged the interest margin between the two currencies. 

Following this, there came a rise in interest rate arbitrage. In general, Hong Kong's bond and monetary markets are relatively less developed. When the U.S. increased its interest rate, investors that invested in fixed income products or those with steady profits shifted to the U.S. dollar, and the HK dollar began losing ground to the U.S. dollar, Zhao Qingming, chief economist with the CFFEX Institute for Financial Derivatives, said to NBD. 

Defect of pegging mechanism exposed

Norman T. L. Chan, chief executive of the HKMA, reiterated Thursday that it will ensure the HKD exchange rate will not weaken beyond 7.8500, which he said is the key of the design of Hong Kong's linked exchange rate system and how the system operates. 

Being pegged to the U.S. dollar guarantees Hong Kong's position in the international financial market, said Zhao. 

However, the currency peg system must be backed by an abundance of foreign exchange reserve. 

Hong Kong has been ranking high around the globe in terms of the size of foreign exchange reserve. 

According to the newest data of the HKMA, Hong Kong's foreign currency reserve assets stood at 440.3 billion U.S. dollars at the end of March, around seven times the size of the region's currency in circulation.

In the short run, thanks to the ample foreign exchange reserve, the HKMA could be able to take actions to prop up currency, but the depreciation pressure facing the HK currency over the past 12 months reveals the defect of the pegged exchange rate system, namely, the rising conflict between the interest rate linked to the U.S. dollar market, Hong Kong's economic growth and financial market, and pertinence to mainland China, Shenwan Hongyuan Securities analysts said in a research report. 

In the long run, whether there is a change in the system will be up to the correlation between Hong Kong's economic growth and the mainland China and the U.S., analysts noted. 

However, Christine Lagarde, managing director of the International Monetary Fund, Wednesday expressed her confidence in Hong Kong's economy and exchange rate system. "The pegging mechanism in place is consistent with the fundamentals of the economy," Lagarde said in an interview with the South China Morning Post. "We certainly don't see in the near future the pegging of the Hong Kong dollar to another currency, other than the U.S. dollar."


Email: lansuying@nbd.com.cn

Editor: Lan Suying