Currency storm heads for Hong Kong

Currency storm heads for Hong Kong

By Nick Cumming-Bruce

SINGAPORE: Modest recoveries by the currencies of Indonesia,
Thailand and the Philippines -- which have been Asia's weakest --
Wednesday brought governments and dealers a welcome respite from
weeks of frantic activity, but no peace of mind.

Now fears are focussing on the Hong Kong dollar -- even with
its huge Chinese support.

After slumping to an all-time low against the dollar on
Tuesday, Indonesia's rupiah rebounded strongly, buoyed by a sharp
hike in interest rates and government certificates on Tuesday.
The Thai baht followed the rupiah upwards, as the country awaited
IMF approval yesterday for a US$16 billion bail-out package.

"It's the eye of the storm," warns Bill Belchere of Merrill
Lynch & Co in Singapore. "It's passing over head, but it's not
over."

In little more than a month, the baht, rupiah and Philippine
peso have all cut their links to the dollar, leaving Southeast
Asia's central banks groping in new territory where neither they
nor dealers can yet determine the currencies' fair value.

Markets in North East Asia are also now a source of anxiety.
South Korea's currency has emerged as an obvious target, falling
to a record low against the dollar on Tuesday.

"It's likely to succumb in the next few weeks," an economist
based in Singapore said, pointing to parallels with Thailand,
with its $40 billion of short-term debt maturing over the next
year, the strain on its banks and growing fears of a liquidity
crunch.

The consolation is that the South Korean government may
accelerate and broaden moves to liberalize its closed capital
markets.

But Korea's predicament is overshadowed by the problems in
Hong Kong, which is defending the last of Asia's dollar pegs. "If
the Hong Kong dollar comes under pressure then there are no holy
cows. That's as impregnable a fortress as you can find in Asia,"
observed PK Basu of UBS in Singapore.

Hong Kong chief executive Tung Chee-hwa confidently predicts
speculative attacks will fail. After the Chinese central bank's
pledge of support, he has the deepest pockets of any government
in the region -- combined reserves of $196 billion -- as back-up.

That did not prevent the Hong Kong stock market plunging 3.8
percent on Tuesday and a sharp rise to 11 percent in interbank
rates, which are usually more or less in line with U.S. rates at
5-5.5 percent.

"We have to hope in Asia that the speculators will go away
when they realize Hong Kong is impregnable, then we are out of
the woods," a financial analyst here commented.

But there are heretics who doubt the speculators will leave or
that the last of Asia's dollar pegs can survive. "It's a thing
that's had its time," said a western banker, insisting on
anonymity. "The rest of Asia has just realigned 20 percent, how
long can these guys hold out? Do they really want to burn $20
billion defending their currency?"

Analysts predict that the volatility which would follow a
float of Hong Kong's currency would spill into other emerging
markets. Already, the uncertainty in Hong Kong is feeding
anxieties in Southeast Asian markets long after currencies there
have hit levels that historically should make them highly
attractive.

Even with credit lines of close to $20 billion put up by the
IMF, Japan, and other countries and institutions, the Thai
currency is poised to slide in coming months from its present
level of about 32 baht to the dollar to nearer 35 baht, say
economists.

Not so the rupiah which looks poised to lead a recovery after
a fall that Wong Yit Fan, chief Asia-Pacific economist of
Standard Chartered Bank in Singapore, called "kind of surreal".
Desmond Supple, head of regional currency research at BZW Asia,
said: "There's going to be a pull-back. It's getting to the point
where local markets are looking extremely cheap in dollar terms."

The question is, when?

-- The Guardian