HK Dollar Peg Will Be Dropped Soon




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ORIGINAL POST

Posted by Sara Silvester 11 yrs ago
That sounds scarry. What will happen if it is really depeg? Most of my family income now is in HKD? Any suggestion?

COMMENTS

Digital Blonde 11 yrs ago
I am an economist, and I can tell you in my humble opinion, that depegging is not going to happen any time soon.

Digital Blonde 11 yrs ago
Actually a surprising amount of economies (primarily in the mid east) have chosen to keep their peg to the US for the moment. The only real notable exceptions are Kuwait and China, this despite inflation running plus 10% in those economies. The new common currency for the GCC looks like it too will peg to the US dollar, though there is still some debate because of course the dollar keeps dropping. The primary reason for keeping the peg is political rather than economic, The Monetary authority seem to be committed to it and even major currency speculators like George Soros seem to take the same view and he bet heavily against the peg in 98 and got burned.


http://www.bloomberg.com/apps/news?pid=20601080&sid=aM2JR0X3jaqM&refer=asia

HKMA Commitment


http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awGzqjDP2EC4

Soros View


It is possible that the peg to the US dollar will be dropped but I reiterate my view that it will not happen any time soon, and even when it does, it will be re pegged to a basket of currencies as other small and even sometimes large economies have done.



Digital Blonde 11 yrs ago
For a very long time my friend, they withstood currency speculators in 1998 and pumped over 100 Billion US dollars into the equity market on a single day just to prevent devaluation back then, I think the government has the wherewithal to continue its pegged exchange rate for quite a while and its not like our policy makers are democratically elected either, so they wont be worrying about re-election.

leghk 11 yrs ago
Interesting discussion. Is the devaluation of the dollar really inevitable? and if so, will this have a negative effect on Hong Kong and other Asian economies as exports to the US fall sharply, on top of the problems caused by the peg to the dollar???

Digital Blonde 11 yrs ago
1998 is not irrelevant at all to the discussion, you were asking what would make the govt abandon the peg and back in 98 EVERY hedge fund/long only fund and his dog was both selling the HK Dollar and simultaneously selling the Hang Seng Index creating enormous pressure for HK to abandon the peg, which is what market participant were betting on. If the HK govt was prepared to withstand the pressure of global financial market participants in order to maintain the peg (substantial pressure), which might I add kept Hong Kong in sustained economic malaise by forcing HK to follow the US interest rate cycle whilst HK was recessing and the US was in the midst of a boom, then I don't really see the govt having to much problem maintaining the peg even with a 40% further drop in the US dollar against Sterling/Euro. They are under far less pressure to do so, and given policy makers here are not up for re election, public sentiment hardly constitutes pressure for them.

Digital Blonde 11 yrs ago
Agreed, the HK govt can hardly defend against against a concerted sustained global effort, but I disagree with the reason for the end of that particular speculative attack. 98 was still closer to the beginning of the financial crisis than the end in my opinion (having started in 97 and lasting at least three years).


If a speculator builds up a short position (or long position for that matter) in a particular asset as was the case with the HK dollar back in 98, then they would of course expect to make a return from having taken that position. What happened in the month of August or October 98 (i cant remember which) was that the HK Govt announced over the weekend if memory serves, that it was going to take measures to support the Hang Seng Index and by proxy the dollar. In effect telling every major speculator and fund manager in the world that it was going to take a long position in HK dollar and equity in advance of it doing so. Come Monday, every man and his dog took the opposite short position and both the currency and equity market was under attack for about three days straight, it was total bedlam.


If you ask me what ended it, I think it was lack of resolve on the part of the speculators at having to cover huge short positions unprofitably in the short run. The HK govt had spent some HK$160 Billion by the end of day 3 and still had some HK$700 billion of reserves to run through, and speculators lacked the will to fight. They basically didn't think the HK Govt had the wherewithal to defend the peg at all cost, which in fact it did.


If they had continued their actions for a longer period of time, inevitably the govt would have broken and a devaluation been forced.

camo2005 11 yrs ago
Does the HKMA really have a say in this ? I think Beijing decides this in reality (not officially though).


If they depeg will there be a peg to the yuan or a basket? Or a basket that practically follows the yuan one?

Digital Blonde 11 yrs ago
I think its the HKMA, they will of course consult with Beijing, but when it comes to Hong Kong's finances Beijing has been remarkably good about not interfering.

alas9495 11 yrs ago
Removing the peg to the dollar would have a positive effect on the HKD and would appreciate in the same way the RMB has appreciated in China. It would have a positive effect on prices as most items are imported into HK so with a stronger currency the cost of imports would decrease. Housing prices would be negatively affected (and sadly this always seems to be the most important issue in HK) as interest rates would rise to cool off an increasing economy. Another factor that would lead to lower housing prices is a stronger HKD makes it more expensive for foreign investors to purchase as their currencies are worth less against a rising HKD. The HKD would rise because higher interest rates add to astrengthen currency scenario. Investors prefer a currency with a good yield and the higher the interest rate differential between the USD (low rates) and HKD would entice investors to hold a higher yielding currency. Selling USD and buy HKD drives up the HKD price like any basic supply and demand scenario.


Over time it is possible to remove the peg (think China, Malaysia) but probably won't happen overnight. The most appropriate immediate measure is to widen the band allowing some market influence on the value. Over time as HK becomes more integrated with China the peg should be dropped but although the USD is down it's not out. It would be poor fiscal management to take a knee jerk reaction and change monetary policy based on the last year and current negative dollar sentiment. Part of the reason for HK economic and monetary stability is because of the peg. Chooe any Asian currency as an example that has not been hit hard market forces in the last 10 years or so. HK weathered these problems because of the peg and because of the HKMA's financial strength to fight off speculators.

Blueberry78 11 yrs ago
What about an obvious practical solution? RMB becomes a convertible currency and HKD disappears and is simply replaced by the RMB overnight?


In the current situation, HK people won't be scared, they are already trying to covert as much HKD in RMB as possible.


What do you think?

Digital Blonde 11 yrs ago
I think that would be a disaster.

axptguy38 11 yrs ago
"What about an obvious practical solution? RMB becomes a convertible currency and HKD disappears and is simply replaced by the RMB overnight?


In the current situation, HK people won't be scared, they are already trying to covert as much HKD in RMB as possible.


What do you think?"


I think people would be scared s**tless. Currencies only hold up as long as people believe in them. They are, in fact, a collective illusion. Doing that sort of thing would, as Digital Blonde says, be a disaster.

sxc 11 yrs ago
Of course, many expats would like the peg removed. Our HKD salaries will be worth more in our home countries.


However, for locals (> 95% of the population?), they like the peg due to its affect on property prices. Yes they will have more expensive rice, but that is outweighed by their gains in their property prices.


I recall reading an article in the SCMP a month or so ago about why the peg is great for HK locals. I can't remember all the arguments, but it made a very good point that popular consensus in HK is for keeping the peg.

axptguy38 11 yrs ago
"Of course, many expats would like the peg removed. Our HKD salaries will be worth more in our home countries."


Not those of us with income in USD! ;)

Whitemischief 11 yrs ago
Perhaps they will switch the peg to the Zimbabwe Dollar before the US Dollar finally collapses!

b3nj0n 11 yrs ago
Very interesting topic. Made me register with asiaxpat.com . At this time, would HKD still go depeg? US economy seems recovering... and considering US election is coming, am sure US will slowly recover.

Newbie Question: I am actually have been relocated to SG (from HK, just this month), would I leave my savings in HKD, or should I transfer it to SGD? And considering my salary is now SGD, would I send my savings to my HKD savings account in HK? or should I just leave it here in SGD?


Digital Blonde 11 yrs ago
There may have been people who thought the dollar might rebound ( I didn't know that many to be honest, people have been predicting a dollar crash since I was 17), but there were far more people out there who were bearish indicated by the direction of the currencies value against its competitors.


After the US reneged on Bretton Woods and Nixon abandoned fixed exchange rates and the gold standard, pretty much all major currencies followed suit and are make believe or fiat, backed by nothing more than the faith people and institutions place in the issuer and the system. Just because one happens to be falling in value doesn't make it any less believable than another. The US is still the largest economy in the world and the worlds largest importer by far, it is only natural that the US dollar is still the most widely accepted of all fiat currencies. That will change in due course as the world itself changes. Unless of course you favour people adopting The Pound as the worlds reserve currency because its value has been rising.

axptguy38 11 yrs ago
"many people still have faith in this make-believe fiat currency."


All currencies are "make believe" in so much as they only have value so long as people believe they have value. As Digital Blonde says they are backed by nothing more than faith.

Digital Blonde 11 yrs ago
I really dont think that is going to happen. thats just my view.

Digital Blonde 11 yrs ago
If you buy a futures contract and you are just speculator, you can take delivery of the physical commodity once the contract expires, if you believe that future price increases are going to be greater then the price you paid plus storage costs and other costs of carry. In fact Oil storage as an ancillary business at the moment is attracting a lot of investment. The fact that oil inventories have not measurably risen, suggests this is not happening however.


http://www.nytimes.com/2008/05/12/opinion/12krugman.html?_r=1&oref=slogin


I am a fan of Krugman, though those on the right are understandably not, but he makes the same argument that inventories are not rising, so there is no stockpiling or hoarding as has happened in the past with previous oil shocks, which means it is unlikely to be a speculative rise. There will of course be speculation built in the price, but I don't believe anymore that is what is driving it.

Ed 11 yrs ago
Re: The Price of Oil.


If you follow our links to top news stories you may have seen that GM has taken a huge change in direction and are going full on into plug-in/hybrid cars (Jolt is the brand they will roll out). The reason - CEO Rick Wagoner has seen the writing on the wall and feels this is not a cycle of expensive fuel - this is the new reality.


There will be some pain for a bit but hopefully this will be the beginning of the end of fossil fuels and clean(er) technologies will emerge.

axptguy38 11 yrs ago
Electric and hybrid cars are all well and good but the power has to come from somewhere. If you're burning coal or oil at a power station in order to generate the electricity for the car you may be gaining in efficiency but the underlying problem is not eliminated.


Hydroelectric has limited expansion potential. The only currently viable large scale alternative to fossil fuels is nuclear power. I'm all for it. It's safe and clean (radioactive waste is manageable nowadays and in any case it's nothing compared to fossil fuel byproducts). However there is a lot of political and popular resistance.

Digital Blonde 11 yrs ago
Not knocking nuclear, because I think its also the way to go, but being uninformed, what happens if we moved substantially into nuclear power say the majority of the worlds electricity was generated that way. How much radioactive waste would that produce and would it be dangerous?

axptguy38 11 yrs ago
You raise a good point. Radioactive waste is always dangerous, but most forms of power generation produces toxic waste. Hydroelectric and solar would be the exception but they are only scalable so far.


A fair sized reactor will produce about 25-30 tonnes of spent fuel. Obviously the levels of radioactivity in that material are quite variable. The spent fuel can be reprocessed, further decreasing radioactivity levels (and incidentally producing more power), and decreasing the volume to about 3 cubic meters per year.


Some quick research showed that "High Level Waste" currently increases worldwide by 12k tonnes per year. Presumably if we went massively nuclear we would be talking several hundred thousand tonnes per year. It does sound like a lot but these elements are quite dense so the volume is not as much as one might think.


It is important to note that the toxic waste produced by nuclear power is only a small fraction of that produced by everything else (other power generation methods, chemical plants and so forth).


It is often said that France, the most aggressive user of nuclear in Europe, also has the cleanest air in any industrial nation and the cheapest electricity.


It is also interesting that the so called "effective does" from coal plants is in fact 100 times higher than that from nuclear plants. As soon as someone says "radioactive" it sounds bad, but compared to other pollutants, nuclear power stands for a very small part of deaths from catastrophic and non catastrophic industrial events, and a very small part of industrial waste. Nuclear power is also extremely highly regulated when it comes to waste management. Compare that to chemical plants and oil/coal plants that in many countries routinely dump their barely processed waste overboard.


I see nuclear power as being to power generation what air travel is to transportation. Very safe, but as soon as there is a plane crash we're all glued to the TV. Driving is far less safe, but it's somehow a bit beneath our notice.



b3nj0n 11 yrs ago
Posted by onemorething (4 days ago)


Where do you plan to spend your money in the future? Why would you save HKD if you don't live in HK? Unless you have a strong view on the HKD of course, but it better be based on more solid arguments than you gave in your posting.


Anyway... welcome to Asiaxpat! :-)

------------------------


Thanks for your warm welcome :)

Aside from my strong feeling about HK, I will still come back to HK once in a while to visit friends. HK is such a safe and convenient place for me.


Also, if my money is in HKD and it suddenly depeg... then, I will be laughing... go go go.. HK, depeg now!!! :)


So, I'll probably leave my HKD in HK accounts. And I'll just start my new savings in SGD while am here in SG. No point for me to transfer my HKD to SGD now since I won't need the money here anyway.


I'll be watching this post...




Digital Blonde 11 yrs ago
People are talking about a dollar rally now.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aJumrN.VohHs&refer=home

Digital Blonde 11 yrs ago
Pretty sure interest rates will rise

Digital Blonde 11 yrs ago
I disagree with that, oil/gas prices and food prices are the two major constituents of any inflation index, if they are experiencing double digit growth in prices as they have, then inflation will and is occuring regardless of whether m1 money supply is contracting. I am not sure where you got that information on m1, but in this case I think its largely irrelvant. The dollar has already started to rally and I believe it will continue to do so though not as far as some people expect. I think the Fed is going to raise rates, because even worse then inflation is the threat of stagflation, which given the state of the US economy is a real possibilty.

sxc 11 yrs ago
Analysis on stagflation fears:


http://business.smh.com.au/stagflation-history-shows-the-fears-are-nonsense-20080613-2q8a.html

Digital Blonde 11 yrs ago
Actually he almost omits it or says its not relevant, and that inflation only occurs if there is a wage price spiral. Which is true but only half the story. He says that there are two types of inflation, demand pull and cost push which is really very basic economic analysis something that a 15 year old student would use to analyse the situation, he fleetingly talks about inflation expectations governing worker contracts, basically denying that a cost of living index rise means that there is inflation in the economy, and that weak demand means workers will not ask for wage increases. He is actually analysing the australian economy, and you try telling an iron ore miner in the outback not to ask for a wage increase if there is say 10% increase in prices.


speaking as a masters in economics who couldnt be bothered to do a Phd


For a start stagflation occured in the 70's to deny its existence is revisionist. Secondly he even has his definition of stagflation wrong, he should look it up in the dictionary, thirdly if people come to expect high inflation rates, they will demand wage increases regardless of the state of the economy, otherwise real incomes get hammered and people are worse off just as occured in the 70's. Finally and most importantly if a consumer price index is rising, that is inflation, the fact that nominal wages are not increasing yet is neither here nor there.


An independant central bank's first priorty in most cases is inflation, it has the tools to tackle it, unemployment and growth are secondary objectives and its tools to tackle it are blunt at best. A rising consumer price index is going to have the central bank very concerned is my view, and to omit the word stagflation for the sake of argument, it would be a more pressing issue if their was weak consumer demand, persistently high unemployment, and rising prices simultaneously. I see an interest rate hike, but thats just my opinion

HKhereIcome 11 yrs ago
Depegging is too drastic and won't happen soon (damages confidence too much). But as the many posts here indicate, the peg is straining. HKMA has to balance the HK$ against the US$ and Yuan; not an easy task. My money's on a readjustment to 7.6-7.7 by the end of the year or within 12 months.

But I wouldn't worry too much until I see HKMA increasing its gold stocks massively.


To the gent asking about Singapore$ - it is the best, most stable regional currency. I'd keep much of my savings in S$ if I were you.

axptguy38 11 yrs ago
There is also a concern about expat workers. HK has a disproportionate amount of expat workers in finance and other industries. Many are on expat packages. Their salaries are often based on some measure including the value of the Honkie vs the "home" currency. If the Honkie is depegged and appreciates significantly, such packages become a higher cost item for the employers.


Not saying this is a prime move behind a decision, but it is a factor.

Digital Blonde 11 yrs ago
I personally don't believe it would be a factor, I think the absolute numbers of people involved are far to small and I think all that would really happen is future contracts would be re negotiated to take account of the fact and when current bonus is calculated, which constitutes majority of a person who works in finance's income, then if the move was significant it would be reflected in their bonus. But it would have to be a significant move to have any real bearing on bonus.

axptguy38 11 yrs ago
A lot of money flows into HK from finance companies. HK is the most important financial center of the Far East. If lots of companies suddenly decide SG is cheaper. ;)


A factor, but probably other things are way more important.

sxc 11 yrs ago
I think the effect on property prices is a greater factor in considering depegging the dollar. Much of HK's wealth is tied up in property. Big drops in wealth = social unrest = a situation communist countries don't like.


The effect on expats is really a very small by-product compared to wellbeing of the larger HK population.

Digital Blonde 11 yrs ago
Definitely agree with that.

Digital Blonde 11 yrs ago
I really don't see investment banks relocating to Singapore if there is a revaluation of the Hong Kong dollar upwards to contain costs. Hong Kong is the financial center of Asia because it is a Chinese city, and with so many Chinese companies listing on the exchange, it just wouldn't make sense, the business is here not in Singapore. That would be like banks moving out of London because the pound is so strong and there are far more foreign workers in London. If there was a move, some hedge fund managers may do so but only because Singapore is already the hub for that, and they would be far and few between, if they are worried about the impact of an appreciating currency on salaries they would renegotiate contracts and any real difference would be taken out of current bonus to reflect increased incomes.

HKhereIcome 11 yrs ago
hmmm... most of the discussion is neither here nor there. For those really keen, I'd suggest reading the HKMA balance statements to get an idea where they are headed.


For most individuals, what really matters is on the personal level - for these, my advice is: (1) if you have a choice between HK$ and US$, ask for your salary etc in HK$ - the adjustment, if it comes, will only be upwards. (2) Save in a range of currencies - most of us will be saving in our home currencies and HK$. My suggestion is to try something else: S$ for instance (because they have committed to a gradual rise against the US$ for the foreseeable future), Yuan (although there may be a chance of a small devaluation soon). Aust$ is probably at the peak now, but any decline would be small, so it's a good store. If you distrust fiat money, try gold or porkies.

If, on the other hand, you are investing zillions, well, you wouldn't be getting free advice from me! :)

Digital Blonde 11 yrs ago
I dont read the HKMA statements, because I cover a separate area my research team do however. I am familiar with their behavior from the currency crisis in the late 90's,When Donald Tsang was the finance secretary and when Joesph Yam speaks, I tend to listen. my view is if they successfully defended the Peg whilst coming under enormous speculative pressure globally, spending US$100 Billion dollars to do so, Then I dont see them abandoning the peg, when they are not under financial attack, and the pressure they face stems domestic inflation. These policy makers are unelected, they have no pressure to please constituents. They're concern would be Property developers and other big business which control the cartel, and an upward revaluation could be disastrous for them. I really dont see the end of the peg any time soon. What I think is feasible is perhaps a gradual timeline towards its eventual demise. But I am not a policymaker so I do know what they are thinking.


As for Gold Warren Buffet has an interesting take on gold which is rather amusing


Buffet emphasized, the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."


well I thought it was amusing

DaHKGKid 11 yrs ago
Yes, I also support that a re-adjustment is going to occur moving downward to 7.6/7.5 next 12 months to align with asian currency appreciation. Some say the dollar would also float as another asian currency until it can be rolled up under the RMB/Yuan.



Digital Blonde 11 yrs ago
I personally cant see either of those scenarios happening myself.

sxc 11 yrs ago
I agree with Digital Blonde: If they successfully defended the peg during the Asian Currency crisis storm, they will defend it during the current environment is which is less than a sneeze compared to the 97 currency crisis.

Digital Blonde 11 yrs ago
I don't remember people discounting the currency crisis as being less than a sneeze, it started in South America and moved very quickly into Asia with countries falling like dominoes, I think more than anything people were shocked by its veracity.

Digital Blonde 11 yrs ago
I really don't think the currency crisis caught on too late with the public, I was here when it happened, and I was working on a trading floor, as soon as those currency markets started going south and then started forcing devaluations, pretty much every equity market in the region tanked. Prior to the crisis there was a real bubble, every man and his dog were buying stocks particularly in Hong Kong, the minute institutions got a whiff of potential devaluations, they were gone so fast, you didn't have time to blink. It was hard, it was fast and it was severe, which contrasts significantly from the current issues we are facing, though almost as bad, the drop has been much more protracted and confined largely to financial institutions. The currency crisis hit everybody simultaneously and there wasn't a person in Asia that didn't feel it. When your currency falls in value 30% and your equity markets fall 50% or more in the space of a few weeks, people feel the effects pretty immediately.

Digital Blonde 11 yrs ago
I don't see how that economist can make the prediction that inflation will not persist beyond autumn. If energy and food costs keep rising, so will the inflation rate, its really not rocket science. Personally speaking I am pretty sure we are at the beginning of a tightening cycle, unless we see a correction in those staple prices, I don't see how we couldn't be.

onemorething 10 yrs ago
It is official now: interest rate cut by the Fed it is!


The credit crisis has finally caught the attention of the (HK) investors/speculators. Too late for most of them now that the HSI has fallen more than 50% from its peak. I am not calling a bottom here, btw.


The financial markets are going to be very very ugly and messy well into 2009 and beyond! And so will be the HK property market. The peg is not really under fire (yet). There are once-in-a-lifetime events ahead of us that will test the very viability of our fiat-money capitalism.

DaHKGKid 9 yrs ago
Is this discussion worth and updated view? Where is the HKD headed? Will it float, will it be linked to the RMB? Views?

Ed 9 yrs ago
I'd have to think that if HK depegs that will send the USD into a spiral because it will send a signal that confidence is gone...


I can't imagine the HK government will want to be the one to send that message out as China wouldn't be very happy.... so I think we will hang on unless the USD seriously tanks leaving no choice...


So I think the question is how far will the USD fall against major currencies and at what point would the HK govt abandon it...

DaHKGKid 9 yrs ago
I'm waiting for one more USD flight to safety recovery and retest of markets, then I am out of USD and HKD. I dont think anyone in HK will wait either!



onemorething 9 yrs ago
@DaHKGKid


That's why it won't come. Last year's dollar squeeze will not be repeated because there is no shortage of dollars or dollar funding any longer.

Ed 9 yrs ago
Implications for the HKD in this...





Why a weak dollar threatens America


It seems nobody in this country wants to take responsibility for the secular decline in the value of the U.S. dollar. When Fed Chairman Ben Bernanke is asked about the currency's decline, he refers the query to the Treasury Department. When the president is asked about the dollar, he often gives the tired old platitude that the U.S. has a strong dollar policy, but his vacuous words seem more like a perfunctory utterances than a bona fide dollar-boosting strategy.


Recently, in an interview with CNBC's Maria Bartiromo, Treasury Secretary Timothy Geithner had some startling comments about the world's reserve currency. When asked about its chronic weakness, and what specifically he was doing to safeguard the dollar, Mr. Geithner said, "…if you look generally, you know, I don't talk about developments in the exchange markets." He continued, "If you look at what's happened over the last year, you've seen really a lot of confidence in the U.S. economy. When the crisis was at its peak … you saw the dollar rise when people were most concerned about the future of the world."


Now that the U.S. dollar is once again caught up in a vicious secular bear market, losing nearly 16% of its value since March alone, the Treasury Secretary is once again opting to plead the fifth. Even worse, he claims that last year was a good example of global confidence in the currency, even though it was down over 8% for the year.


Can he really be counting on another collapse in the global economy to pull the dollar out of its downtrend? To use the previous year as an example of confidence and strength in the country, or the currency, is spurious in nature. It illustrates that our Treasury Secretary either tacitly condones a falling dollar or has no idea what causes a weak currency.


The progenitor of our weak dollar is the skyrocketing monetary base, which reached an all-time record high of $1.86 trillion last week. The Fed's monetization of banks' assets has caused real interest rates to become negative and increased interest rate differentials with the currencies of more sober central bankers, like Glenn Stevens from Australia. In addition, our profligate spending habits have caused record budget deficits and even caused our healing trade deficit to reverse course and head higher. Unfortunately, all those trends seem firmly intact and are actually growing worse.


There is, however, no shortage of gurus who will tell you that a weakening dollar is great for America. They'll tell you that it boosts exports and the earnings of domestic companies that conduct business on foreign soil. Their logic is flawed. First off, a falling dollar has actually pushed our trade deficit higher--not lower. If a weak dollar bolsters our economy and our manufacturing base, then why has the trade deficit surged since 2001, even as the dollar lost nearly 40% of its value based on a basket of the six currencies of our largest trading partners?


http://www.forbes.com/2009/10/21/falling-dollar-geithner-personal-finance-foreign-investment.html



axptguy38 9 yrs ago
Nice article. However I am confused by the use of the word "secular". How is the bear market rejecting or unrelated to religion in this context?

onemorething 9 yrs ago
"Secular" as in "non-cyclical".


The depreciating dollar is putting the cost of bailouts at the US of A's creditors. If I may make a bold prediction: the dollar will ultimately be replaced by the "New US Dollar". All domestic accounts receiving 1 NUS$ for every 1 US$. Every overseas holder of US$ will receive 1 NUS$ for every 10 US$.

DaHKGKid 9 yrs ago
Yes I agree it will be replaced with a new USD, but not until we see another flight to safety during the next step down. I am calling for a simple repeat of last November which will be based on this new bubble formed and currencies were back in line.


I believe Geithner & Bernanke know this. It was a windfall payment for all their buddies at the US taxpayers expense and to get everyone to think about (just the sheeple) to get adjusted to trimmer living.


Then the USD tanks as Onemorething says above, they then dump the old USD, 10-1 and value it at say $0.60 on the index, the US turns the corner and starts exporting, goes on a protectionist binge only to save themselves.


Funny how a DELL call centre goes back to the Yanks!

DaHKGKid 9 yrs ago
That's the obvious as stated above in this link since the beginning OR trading under a basket of asian currencies.

axptguy38 9 yrs ago
"Excuse me for stating the obvious, but wouldn't it make more sense to link the HKD to the RMB ?"


Maybe. However the most important factor for a currency is confidence. If people have confidence in the value of the USD, and therefore the HKD, that's good enough. Changing to an RMB peg introduces massive uncertainty in the short term. This has to be balanced against long term benefits.


In other words: If it ain't broke, don't fix it.


Sure, the USD could become a banana republic currency, but if that happens it is probably a relatively short term thing. Pegging and re-pegging should not be done in response to short term (12-24 months) effects.

onemorething 9 yrs ago
Pegging your currency is about handing over your monetary, economic and even political sovereignty to the country of the underlying currency. What is good for China and the RMB may not be good for HK. I would argue that it is better to be "one country two currencies" than "one country one currency". Investors prefer certainty over uncertainty and stability over volatility. Hence the HKMAs fight to hold on to the USD peg.

cookie09 9 yrs ago
"Excuse me for stating the obvious, but wouldn't it make more sense to link the HKD to the RMB ?"


not sure this has been written already but you cannot peg to a non-convertible currency (of course you could, but an open economy like hk cannot in reality)


Topol 9 yrs ago
The ultimate aim must be to replace HKD with RMB but this will only occur once the RMB is fully convertible. The capital controls are very slowly being relaxed - you can withdraw RMB from your ATM and use RMB to pay for most things in HK if you wish. I doubt that HK will abandon the peg but will choose to pahse out the HKD as the RMB becomes a convertible currency - but when is anyones guess.

DaHKGKid 8 yrs ago
Maybe time to restart this thread ED!

Ed 8 yrs ago
Agree... as I posted on the property forum... USD (HKD) is continuing to drop against most currencies... US is supposedly planning big QE as soon as November... this will drive prices of most imports into HK higher and higher...


Anyone care to speculate as to what the HK govt will do if the HKD keeps tracking downwards... at what level would they take action and what might that be....

DaHKGKid 8 yrs ago
I believe a currency crisis is underway already. Anything pegged to the USD or dependant on it can be a very tricky ride going foreward.


I've been out of the USD since it breached 81.88 on the index, pulled out of HKD since 80.68.


I dont know what HK will do but IMHO it will be too late so I'm out!


US pointing at China as manipulators is just unjust and smoke a mirrors to deal with the demise of the USD long term.


The QE you speak of is underway and started 72 hours ago. November is going to be an absolute mess out there!

Ed 8 yrs ago
Good article in the IHT today:


More Countries Adopt China's Tactics on Currency


“Everyone’s playing beggar-thy-neighbor games, willingly or unwillingly,” Michael Pettis, a Peking University professor and economist at the Carnegie Endowment for International Peace, said in an interview. “This is very similar to what happened in the ’30s, when the collapse in Europe’s ability to finance itself also meant a collapse in its trade deficit, and the world rushed around trying to find a new equilibrium in which every country tried to grab a larger share of the dwindling global demand.”


More: http://www.nytimes.com/2010/10/04/world/04currency.html

Ed 8 yrs ago
This is also good - from the Financial Post:


Fears of currency wars helping to lift gold prices


Until recently, it seems that one of the main underpinnings in the strength of gold has been fears of inflation. However, inflation data in the last several months has lead to an increased focus on the possibility that deflation may be the “flation” on the horizon.


As inflation looks increasingly distant in the rear view mirror, a new idea is gaining more mainstream attention as an explanation for gold. That idea revolves around the opinion of investors that currencies are being sacrificed by governments desperate to maintain their exports. The problem with this policy approach is that as long as each country seeks to benefit by depreciating its own currency, then other countries will suffer. In short, this beggar thy neighbor policy attempts to fix one country’s problems at the expense of the others.



Read more: http://www.nytimes.com/2010/10/04/world/04currency.html




Ed 8 yrs ago
Question: Doesn't holding HKD to some extent act as a natural hedge against USD weakness?


If the USD continues to weaken because of US money printing/attempts to bring down the USD to boost trade.... that drives inflation in HK through the roof because we import so much... and the govt eventually has to act.... the peg goes... and the HKD value increases relative to other currencies...


Also, considering most people on this forum live in HK... is it not better to hold HKD because one never knows which currency is going to hold its value... and we spend our money in HK... bit of a gamble to go into another currency then find it tanks... and the HKD depegs and rises...

DaHKGKid 8 yrs ago
I think you have to be ready for both scenarios but right now I've watched my CHF strengthen against all currencies playing a long term trend.


If you have a daily FX account with very low trading fees if there is a swing one way or the other you can act quickly. If I need to purchase something in HKD i just transfer in CHF or trade an amount needed at the time netting the increase each time.


I'm worried that the HKD will loose substantially before the Peg is lifted and then will buy back in at that point plain and simple.

fizzfuzz 8 yrs ago
906 days ago, Sad Sack posted the prediction. We are still waiting... The truth is that HKD needs to be realigned. It just won't happen within the next couple of years.

DaHKGKid 8 yrs ago
Correct and on the way it will suffer the fate of being pegged to USD. Looks like another leg down by 1% today.


I'm watching very closely though starting November as right now the stock market is on a tear but I see a tipping point coming very shortly for the USA around mid-terms.


Gold up, oil up, $ down. Some are stating Nov 8 -11th will be the exact time frame of this tipping point which is US centric and will be nasty for a 2-3 period.



Ed 8 yrs ago
Hong Kong faces heat on dollar peg


Pressure on Hong Kong to revalue its currency – firmly pegged to the US dollar since 1983 – is mounting. There is also a growing consensus that the current level of the Hong Kong dollar and interest rates are far too low given the city’s strong economic performance.


In fact, prime brokers in Hong Kong are convinced that the local government will reset the peg or abandon it altogether so that it can raise interest rates.


Many are offering their hedge fund clients a trade to bet on revaluation of the Hong Kong dollar, which involves borrowing US dollars to buy Hong Kong dollars, according to market participants.


The Hong Kong dollar is tied to the US dollar and trades in a small band between HK$7.75 and HK$7.85. Recently, the Hong Kong currency has been trading at the upper end of that band, which has an impact on those who deal in large sums.


The Kuwait Investment Authority, for example, was committed to buy a HK$7.8bn stake in the listing last month of AIA, the Asian arm of US insurance group AIG. When the time came for the sovereign fund to write a cheque in Hong Kong dollars, it found that the amount of US dollars it had to pay had risen substantially from its original estimate.


Hong Kong dollar Among those who expect the peg to disappear in coming years is Shan Weijian, the former investment star at private equity group TPG and now chairman of alternative asset manager Pacific Alliance Group in Hong Kong. Mr Shan cites the way the Hong Kong dollar has been trading at the top of its band as an indication of the pressure the currency is under to rise, and he says he expects the peg to be dropped within five years.


Analysts say it is usually problematic when a strong economy has a weak currency. Thanks to the peg, Hong Kong is importing its monetary policy from the US. But the American policy of zero interest rates to stimulate a listless economy is hardly appropriate for an economy that is growing at a rate of more than 6 per cent a year, say analysts. And while the US is desperately attempting to boost asset prices, Hong Kong’s property prices are already high – and rising.


If the peg were to disappear tomorrow, many analysts forecast that the Hong Kong dollar would appreciate by a minimum of 10-15 per cent. But will it?


The trade offered by the prime brokers is a mirror image of what transpired during the Asian financial crisis when hedge funds were desperate to short the currency, an attack the city survived largely because HSBC and the Hong Kong Monetary Authority cut off the supply of the local currency, making it difficult and expensive to borrow and short.


HKMA officials and HSBC executives say there is no chance the government will alter the peg.


“Hong Kong likes certainty. Here the certainty has been that the property market goes up, trade goes up and horses race on Wednesdays and Sundays. If the peg was broken there would be both political and economic uncertainty,” says a senior HSBC staffer. “The impact would be fundamental to our business.”


The basic law enshrines the Hong Kong dollar as the only currency for 50 years after the region’s return to China in 1997. “If we re-peg, the Hong Kong dollar is dead,” the person adds.


Still, Hong Kong is well on its way to becoming a de facto dual currency centre as China continues to take steps to internationalise the renminbi.


“The increase in Chinese renminbi circulation would give rise to a dual currency system in Hong Kong and over time could pave the way toward the ultimate endgame of a Hong Kong dollar/renminbi peg in the very long term,” economists at Goldman Sachs in Hong Kong noted in a report last week.


In the past, it has not been in Hong Kong’s interest to tamper with the peg. But that isn’t necessarily the case today. “If there is one or two more years of this, then things become more tricky,” the HSBC executive says.


http://www.ft.com/cms/s/0/6a6988b6-e774-11df-b5b4-00144feab49a.html

Ed 8 yrs ago
Not So Fast, Yuan Bulls


Rising demand for the Chinese yuan and yuan-based products in Hong Kong has gotten a fair amount of play in this column. Now, all that yuan buzz has spurred debate as to whether Hong Kong might abandon its 27-year peg to the U.S. dollar.


Barclays Capital recently suggested in a report that the Hong Kong dollar could drop its dollar link in a year or two as yuan deposits drive out holdings of Hong Kong dollars pegged to the falling greenback. Nomura issued a report saying it didn't expect the peg to go within one to two years, but it warned, "we expect pressure for a regime change to increase through this period." Deutsche Bank, too, warned that market speculation about a Hong Kong dollar revaluation will intensify.


More http://online.wsj.com/article/SB10001424052748704405704575596001442982756.html

CaptDave 8 yrs ago
I do hope it will happen soon.

We have been tied to the US$ like an anchor ... it was useful when we faced storms in the past, but now the anchor is dragging us down. The profligate US is going bust.

vzbtech 8 yrs ago
Guys do you think its good idea to hold my 'savings' from remitting to my country?? speculating the depegging any time soon and hoping to get much better exchange rate once its depegged ;-)

axptguy38 8 yrs ago
vzbtech. In general, you should diversify. Make sure your exposure is distributed among different currencies and assets. In other words, spread it out to decrease your risk.

vzbtech 8 yrs ago
Thanks axptguy. thats the best option.

Ed 8 yrs ago
Hong Kong Official Stands Up for U.S. Dollar


A top official with Hong Kong’s monetary body put to rest on Tuesday any concerns that the Hong Kong dollar would be delinked from its American counterpart, saying that China’s renminbi did not meet the criteria needed to be an anchor currency.


Eddie Yue, the deputy chief executive of the Hong Kong Monetary Authority, said that among the requirements were a fully convertible renminbi, the removal of capital controls, the free movement of the Chinese currency, a high degree of synchronization between the economic cycles of Hong Kong and mainland China and wide and liquid financial and asset markets in mainland China.


More http://dealbook.nytimes.com/2010/11/16/hong-kong-official-stands-up-for-u-s-dollar/

KrisL 8 yrs ago
Seems to me that the economic cycles of Hong Kong follows mainland China more than the US, at least in terms of GDP growth and unemployment etc Also, as mainland China is pressing for the renminbi to replace the greenback as the world's reserve currency, I'm surprised if they (China) wouldn't want the HK dollar to be pegged to the renminbi?

Ed 8 yrs ago
Is the Dollar About to Become Pegged to a Basket of Currencies?

http://www.thestandard.com.hk/news_detail.asp?pp_cat=30&art_id=113752&sid=33252070&con_type=1


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