CONFIDENTIAL
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4.
By the end of 1987 the US dollar had fallen by 21.3%
against sterling, 23.4% against the yen, 21.2% against the Swiss
franc, and 18.2% against the Deutsche mark (Table 1).
HONG KONG DOLLAR
5.
Under the linked exchange rate system, the market
exchange rate of the Hong Kong dollar against the US dollar remained
stable during most of 1987. Speculation on a revaluation in the
first and fourth quarters of the year generated occasional upward
pressure on the exchange rate of the local currency. In
mid-December, the Hong Kong dollar was traded at HK$7.7560 to US$1,
the highest level in the year. Nevertheless, this represented a
deviation of only 0.6% from the linked rate. The strong
determination shown by the Government in maintaining the link,
successive cuts in local interest rates, together with the threat of
a possible introduction of negative interest rates were effective in
forestalling a further rise in the market exchange rate of the Hong
Kong dollar. At the end of the year, it stood at HK$7.7650 to US$1.
6.
The overall exchange value of the Hong Kong dollar is
affected largely by movements of the US dollar against other major
currencies. In the early part of 1987, the US dollar was generally
weak. Between March and July, it experienced a period of relative
stability under the Louvre Accord. Then, as the US trade and budget deficit problems persisted, the US dollar was battered by another
CONFIDENTIAL