Hong Kong's central bank intervened yesterday for the first time in nearly a year to stem a rise in the Hong Kong dollar and keep it within official trading limits against the US dollar.

Traders said funds had poured into Hong Kong banks in the past few days as the city's sound financial system and currency peg to the US dollar were seen as a safe haven, putting more pressure on the local currency.

"Markets in general are very volatile," said Carlos Cheung, chief foreign exchange dealer at Bank of East Asia. "Hong Kong is seen as a safe haven as neighboring countries are quite unstable financially."

The central bank, the Hong Kong Monetary Authority (HKMA), injected about HK$3.88 billion into the market yesterday afternoon as the Hong Kong dollar was trading at around 7.7540 per US dollar.

The currency is pegged to the US dollar at 7.8, but can trade between 7.85 and 7.75. The HKMA is obliged to keep the currency in that range under an arrangement known as the convertibility undertaking.

"The Hong Kong dollar exchange rate has strengthened to near the strong side of the convertibility undertaking rate, while short-dated Hong Kong dollar interest rates rose to a premium over US dollar interest rates," an HKMA spokesman told Reuters.

"These developments reflect increased demand for Hong Kong dollars. Taking into account market conditions, the HKMA operated within the convertibility zone, purchasing US dollars against Hong Kong dollars," he said.

Global downturn

By late afternoon yesterday, the currency was trading at around 7.7539 to the US dollar.

"It's still very near the strong side of the convertibility undertaking, so I wouldn't rule out further injections," said Frances Cheung, a strategist at Standard Chartered Bank.

The Hong Kong currency's appeal as a safe place to park money was underpinned by the US dollar's rise to a two-year high against a basket of currencies on Thursday, analysts said.

Investors have pulled money out of other Asian markets in the past few days, worried about how the region will be affected by a global economic downturn.

Emerging markets generally were perceived as much more risky after it was reported that Pakistan and Hungary sought help from the International Monetary Fund and Argentina nationalized its pension system, seen as an attempt to stave off default.

Reuters

(HK Edition 10/24/2008 page2)