The Hong Kong dollar’s exchange rate fell on Friday, paring some of the previous session’s gains that were spurred by comments from former Hong Kong Financial Secretary Henry Tang on the local currency peg, with some traders suggesting the market had overreacted to his remarks.
In an interview Thursday, Tang, a contender in the race to be the city’s next chief executive–didn’t rule out adjusting the Hong Kong dollar’s trading band against the US dollar, but affirmed the need to maintain the U.S. currency peg.
“That band was put in place for a reason. I would not speculate or comment on whether this is the right moment to expand the band so that we will have more wiggle room, but I think by putting in a mechanism, one can make use of the mechanism to the best interest of Hong Kong when necessary,” Tang said.
Under Hong Kong’s currency board system, the Hong Kong dollar is allowed to trade in a range of HK$7.75 to HK$7.85 to the U.S. dollar.
Tang said the peg has given Hong Kong “the stability…that [has] facilitated many of our exporters so that they don’t have to account for exchange risks.”
His comments sent the U.S. dollar to a low of HK$7.7545 late Thursday, compared with a high of HK$7.7645 earlier in the day.
However, Tang told local media late Thursday that he had no plans to alter the currency peg and the Hong Kong dollar trading band if he is elected. At 0513 GMT on Friday, the U.S. dollar regained some ground to HK$7.7576.
The Hong Kong Monetary Authority reiterated on Friday that it sees no need to adjust the Hong Kong dollar trading band and added it has no plans to do so.
“It remains questionable whether he will become the next chief executive,” said a senior trader at a U.S. bank, noting that the market “clearly overreacted” to Tang’s comments.
“I believe many traders weren’t taking his comments too seriously, but instead used this as an excuse to sell the greenback and that’s it,” the trader said.
Another trader at a Singaporean bank said he saw most of the Hong Kong dollar buying conducted by U.S. and U.K. lenders, with a total of around US$500 million-US$600 million worth of local currency purchased.
“The market has been looking for a reason to sell the greenback in favor of Hong Kong dollars after the U.S. currency’s recent gains, boosted by the AIA share deal. The U.S. dollar was overbought as a result,” the trader said.
American International Group Inc. raised US$6 billion in its sale of shares in Hong Kong listed insurer AIA Group Ltd. earlier this week, prompting some banks to prepare large amounts of US dollar funding for the deal.