TNAG-1483-FCO40-2037-Economic-situation-in-Hong-Kong-1986 — Page 215

Introduction

CHAPTER 3 : THE FINANCIAL SECTOR

3.1

During the first half of the year

year the exchange rate of the Hong Kong dollar against the US dollar remained close

Except for

to the linked rate of HK$7.80 to US$1 (1)

•

a

short period in late April, the exchange rate of the Hong Kong dollar was for most of the time slightly above $7.80 per US dollar, with interest rates in Hong Kong slightly below those of the US dollar. However, reflecting the continued weakness of the US dollar worldwide, the Hong Kong dollar depreciated against most other

other foreign currencies in the first half of 1986. As at the end of June 1986, the trade-weighted exchange

rate

with 70.6 at the end of 1985.

index (2) of the Hong Kong dollar was 65.4,

compared

/3.2

(1)

-

Currency notes in circulation may only be issued by the two note-issuing banks - the Hongkong and Shanghai Banking Corporation and the Standard Chartered Bank against holdings of Exchange Fund certificates of indebtedness. Prior to 17 October 1983, certificates of indebtedness were issued and redeemed against payment in Hong Kong dollars. Under the present linked exchange rate system, such payments are made in US dollars, at a fixed exchange rate of US$1 = HK$7.80. The note-issuing banks in turn extend this fixed rate to all banks in Hong Kong in respect of their dealings with them in notes. In the foreign exchange market, the exchange rate of the Hong Kong dollar continues to be determined by market forces. But operating against the background of the fixed rate for certificates of indebtedness, these forces tend to bring the rate in the foreign exchange market close to the fixed rate of HK$7.80.

(2) The trade-weighted exchange rate index is an indicator of the average

position of the Hong Kong dollar against a

against a fixed

fixed basket of other currencies. The 15 countries whose currencies are included are selected on account of their importance in Hong Kong's trade and world trade, and the weights reflect the relative importance of the 15 countries in Hong Kong's visible trade.

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