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Currency Report : Hong Kong Dollar Rate Slips as Share Market Tumbles

February 24, 2011 - Written by John Cameron

Hong Kong's Financial Secretary John Tsang delivered the annual budget address yesterday, giving cause for optimism regarding the economic situation. He announced that Hong Kong’s economy had expanded by 6.8% last year, largely due to its strong links with China and predicted that GDP would expand by a healthy 4-5% in 2011.

Much of the economic expansion in Hong Kong has been due to wealthy Chinese individuals taking advantage of cheap credit and the weak Hong Kong Dollar to purchase property. This has caused the property market to rise at unprecedented levels, with prices gaining 60% over the last 26 months. Tsang announced that Hong Kong authorities would be releasing further tracts of land for development in order to keep property prices in check. They have also limited the percentage of the property price that purchasers of luxury properties are permitted to borrow and introduced a property sales tax in order to cool price inflation.

These steps taken by Hong Kong’s authorities to control inflation may serve to further weaken the HK Dollar as they are using these measures as an alternative to raising interest rates, causing investors to down-grade their interest rate expectations for Hong Hong for the next 12 months and hurting the Hong Kong Dollar.

Hong Kong’s Hang Seng equities index has endured a torrid week with investors shifting funds out of riskier assets and into the safe haven currencies, with the Yen and Swiss Franc seeing strong gains. The Hong Kong Dollar has progressively weakened against the US Dollar since the first week of November, 2010, when it touched the significant 7.7500 level, the strongest it is allowed to trade to, due to its 7.7500-7.8500 pegging with the greenback. Since then, the HK Dollar has suffered significant weakness and there was little this week to suggest that this trend will be arrested.

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