Hong Kong defends US dollar peg as stocks surge

Hong Kong's de facto central bank intervened in forex markets for the first time in eight months to protect its currency's peg to the US dollar as a massive surge in the city's stock market drives up demand for the local unit.

The Hong Kong Monetary Authority (HKMA) said it sold HK$3.1 billion ($400 million) on Thursday at HK$7.75 a dollar in a bid to weaken the currency. The last time it was forced into such a move was in August.

"Demand for the Hong Kong dollar increased alongside the rise in the stock market recently," HKMA said, according to Bloomberg.

The monetary authority added that it would continue to closely monitor "market developments".

The city's equities market surged more than six percent over Wednesday and Thursday as mainland investors use a new link-up programme with Shanghai to pile into the market. Turnover on both days hit smashed previous record highs.

Investors north of the border are seeking out relatively cheap stocks after a year-long rally in Shanghai of about 90 percent that has been fuelled by hopes for new economic stimulus measures.

The Hong Kong dollar moves in a narrow band against the greenback and when the HK$7.75 mark is reached the HKMA steps in.

The authority intervened 24 times to defend the 32-year-old peg in July and August last year, Hong Kong's Standard newspaper said.

During that time it injected a total of $9.7 billion into the financial system, according to data compiled by Bloomberg.

Analysts said that HKMA would likely have to step in again if capital continues to flow in to Hong Kong.

"The Hong Kong dollar will trade near the strong end of the trading range in the near term," Kenix Lai, a Hong Kong-based currency strategist at Bank of East Asia Ltd, said.

"It isn't due to speculation on the peg but massive capital inflows."

-- Bloomberg News contributed to this story --