Hong Kong Buys $2 Billion to Keep the City's Currency Pegged

The Hong Kong Monetary Authority said it bought $1.2 billion late Tuesday at HK$7.75 a dollar, the upper limit of a band that triggers intervention, taking today's injection to $2 billion. It last intervened in April, buying $9.2 billion in total during the month. The HKMA "will monitor the market developments closely and maintain the stability of the Hong Kong dollar," it said in a statement. Hong Kong's dollar is drawing funds as last month's surprise yuan devaluation and the prospect of higher U.S. interest rates push currencies lower across Asia's developing economies. The weakening of the yuan was followed by exchange-rate shifts in Kazakhstan and Vietnam, making investors nervous about regime changes in other currencies. "The demand for Hong Kong dollars comes from the unwinding of yuan after the devaluation," said Raymond Yeung, a senior economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. "It also reflects demand for safe-haven assets as Hong Kong's dollar is pegged to the U.S. dollar. We aren't seeing a huge amount of speculation on changes in the peg." The Hong Kong dollar traded at HK$7.75 as of 6:20 p.m. local time, according to data compiled by Bloomberg. Its one-year implied volatility, a gauge of expected price swings used to price options, rose five basis points to 2.12 percent. That compares with a decade-high 3.20 percent reached last week that was more than triple the level before China's Aug. 11 devaluation. Devaluation Risk Low The city linked its currency to the U.S. dollar in 1983, when negotiations between China and the U.K. over Hong Kong's return to Chinese rule spurred an exodus of capital. In 2005, policy makers committed to limiting the currency's decline to HK$7.85 against the greenback and capping gains at HK$7.75. The Hong Kong dollar was little changed against the greenback in the past month, the second-best performance in Asia after the Japanese yen's 3.4 percent gain, according to data compiled by Bloomberg. Malaysia's ringgit tumbled 8 percent in the region's biggest decline, followed by the Indonesian rupiah's 4 percent loss. Hong Kong had $339.9 billion of foreign-exchange reserves at the end of July, the eighth-largest stockpile in the world. "Confidence in the Hong Kong dollar exchange rate's stability is supported by the backing of the more-than-sufficient FX reserves, and the HKMA's strong track record of fending off speculation over the last three decades," UBS Wealth Management strategists Teck Leng Tan and Patrick Ho wrote in a research note on Monday, The risk of a Hong Kong dollar devaluation against the greenback is low, they said, Bloomberg reports.