22
Wednesday, December 13, 1972
other currencies in anticipation of a depreciation in the value of sterling
to its guarantee level of US$2.40 to £1 unless the benefits from such
movements were likely to be sufficient to at least offset losses in earnings
resulting from the interest rates in other financial centres being generally
much lower than in London. Some sales of gilt edged aecurities have been
made to provide funds for buying foreign currencies but, because the London
gilt edged market has been weak it would not, for obvious reasons, have been
prudent to make large scale sales of gilt edged securities, As sterling
fixed deposits and other investments mature we have switched these into
foreign currencies and our sterling interest earnings, which are in excess of £30
million (about 12% of recurrent revenue) a year, have been similarly re-employed
outside London. While the sterling/dollar exchange rate is below US$2.40
to £1 we run the risk of incurring a further loss in the value of our overseas
roserves if we awitah out of sterling. This is because sterling switched
into other currencies while the guarantee is operative would cease to be
eligible if the average rate of exchange does not fall by 1% or more between
settlement dates. For these reasons we have had to slow down our diversi-
programme since 25th October, the date sterling fell for the first
time below US$2.40 to £1.
fication
Conclusion
Sir, it is almost exactly a year since the Smithsonian settlement
announced on 19th December 1971. It has been an exceptional year in the
international monetary field and for Hong Kong many of the decisions taken
in the financial capitals of the world have had a very special significance.
/et,