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Hong Kong Dollar Prediction - Equities Tumble in Hong Kong to Hurt Local Currency

February 10, 2011 - Written by John Cameron

The Hong Kong stock market suffered a major sell-off last night, losing 1.97% to close 455 points down on the day. This poor performance was driven by yesterday’s interest rate hike in China which was the second time in six weeks that the Chinese Central Bank has opted to raise.

Speculation abounds in Asia that the Chinese rate hike will spur other Central Banks in the region to tighten monetary policy. Hong Kong has relatively lower rates than the majority of other Asian economies, (the Central Bank Rate currently stands at 0.5% and has done for over two years), which means that institutional investors are being tempted to shift funds out of Hong Kong and into more rewarding regions in anticipation of a rate-hiking cycle. This looks likely to suppress the Hong Kong Dollar in months to come.

The Monetary Authority of Hong Kong announced that its Hong Kong Dollar currency reserves stood at HK$273.2Bn at the end of last month. These foreign currency reserves amount to over eight times the amount of currency in circulation in Hong Kong, meaning that Hong Kong has the ninth largest foreign currency reserves in the world after China, Japan, Russia, Saudi Arabia, Taiwan, India, Brazil and South Korea. This puts Hong Kong policy-makers in a strong position, should they wish to take steps to intervene to strengthen or weaken the Hong Kong Dollar, an action which they have carried out with some regularity in recent times. The market will be looking to tonight’s equities session in Hong Kong to provide some stability and shore up the local currency.

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