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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (16625)	11/23/2004 10:35:12 AM
From: Chispas	Respond to of 116555

Kinda' explains why Steve Saville moved to mainland China... (His kids are now learning Mandarin) Traders are betting that the Hong Kong dollar will come unstuck from the greenback, but we've seen this fail before. By George Wehrfritz Newsweek International Nov. 29 issue - They're back! Those soulless movers of hot money who toppled Asian currencies in 1997 are again betting that the Hong Kong dollar will abandon its long-held peg to the greenback. Most analysts say the gamblers could get slammed as hard as they did when the government aggressively defended its currency in 1997. Nonetheless, speculation has prompted a real debate on the Hong Kong dollar's future, with implications for the city's financial independence and the pace of its integration with a rising China. For now, Hong Kong's dollar remains a rock. Pegged at 7.78 to one U.S. dollar when the city's former colonial rulers abandoned a floating rate to quell runs on local banks in 1983, it hasn't budged since. Nonetheless, billions in hot money have coursed into Hong Kong's banks, stocks and real estate of late on the logic that the local dollar is now a proxy for China's yuan. With Chinese exports booming, the thinking goes, Beijing could soon succumb to foreign pressure to lift its artificially weak currency, perhaps by 5 to 6 percent. Since they can't buy the protected yuan, traders are buying the Hong Kong dollar on the hope that it would follow the yuan upward. Most leading economists reject that analysis. Andy Xie of Morgan Stanley calls it a "fantasy trade" and predicts a rerun of 1997, when traders lost billions betting that the Hong Kong dollar would collapse. Xie blames hedge-fund managers in places like New York who "look at a map, see that Hong Kong is next to China and bet long on the Hong Kong dollar." He adds: "That sounds like a farce, but it's true." Dong Tao of Credit Suisse First Boston says that "while the market considers the Hong Kong dollar a proxy, I don't," citing "very different fundamentals." While China's currency does not reflect the strength of its export boom, the Hong Kong dollar is not underpriced for an economy in which employment is weak and output remains below the 1997 peak. The optimal outcome for Hong Kong: currency appreciation in China but not locally, which would make the city relatively cheaper for foreign investors. At least in the short run, all the hot money is bringing down interest rates, fueling a run-up in stock and real-estate prices. Share prices have risen more than 9 percent so far in 2004, and the price of luxury flats is up 50 percent. Are these asset bubbles? "I can't comment on what traders think," says Hong Kong Monetary Authority spokesperson Wong Hing-fung. "I can't say they are irrational." Yet Wong also reiterates that "the government is committed to maintaining currency stability in Hong Kong," an oft-repeated endorsement of the dollar peg that should dampen speculation but hasn't. CLSA economist Jim Walker calls the proxy-currency trade a "strange concept," but says that if Beijing does allow the yuan to appreciate, it will force "a real debate" about whether Hong Kong can maintain the dollar peg. The best argument for the peg is that abandoning it would undermine Hong Kong's independence. Having a stable, globally traded currency underscores the city's status as a safe hub for China-related banking, finance and investment. Conversely, linkage to the yuan might be interpreted as a step toward phasing out the local dollar altogether, and toward Hong Kong's becoming just another Chinese city. That's not in the offing, according to most forecasts anyway. Nor would it serve the city's interests. With Alexandra A. Seno in Hong Kong msnbc.msn.com

To: mishedlo who wrote (16625)	11/23/2004 12:29:32 PM
From: ThirdEye	Respond to of 116555

Alternatively, the US government could raise taxes to cut the fiscal deficit, which would stabilize the dollar and the treasury yield at the same time. Does he not know who and what are in the White House? Dream on....