XN000022-1972-12-13 — Page 37

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Wednesday, December 13, 1972

is closely linked to sterling and the greater part of our reserves are, as a matter of fact, in sterling. However, to have adopted this course

straight away would have had the disadvantage that the Hong Kong dollar would

still be floating with sterling albeit at a different rate; and so we

decided, as an interin measure, to establish a direct link with the U.S.

dollar at a little below the cross rate established in December last year.

Thus we insulated the Hong Kong dollar from the effects of the floating of

sterling.

Before the floating of sterling the cross rate between the Hong Kong dollar and the U.S. dollar only moved in response to the movements of the sterling/US dollar rate within the band of 4%. But with the Hong Kong dollar linked directly to the U.S. dollar the rate could move in response

to market forces affecting the Hong Kong dollar as such.

As with any economy,

there are always differences of timing between purchases of foreign currencies

by our importers and other traders and the sales of such currencies by our

exporters which causes the rate to move for short periods in either direction.

But under the rules of the International Monetary Fund the rate has to be

contained within a 4% band and so the Hong Kong Government is now obliged,

whenever necessary, to maintain the rate within the band by selling U.S.

dollars for Hong Kong dollars when the rate approaches the lower limit of

HK$5.7771 and selling Hong Kong dollars for U.S. dollars when it approaches

the upper limit of HK$5.5229.

/Consequences