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