TNAG-1773-FCO40-2525-Hong-Kong-Exchange-Fund-Hong-Kong-Futures-Exchange-Limited--1988 — Page 81

CONFIDENTIAL

THE EXCHANGE FUND

REPORT FOR THE YEAR ENDED 31 DECEMBER 1987

1.

The Fund's Balance Sheet as at 31 December 1987, together

with its Income and Expenditure Account, Accumulated Surplus

Account, Exchange Equalisation Reserve Statement and Investment

Equalisation Reserve Statement are attached.

FOREIGN EXCHANGE MARKETS 1987

2.

The year started with bouts of speculative pressure

against the US dollar. As a counter measure, the Group of Seven

(G7) industrialised countries agreed in Paris on 22 February to

stabilise the major currencies around the then prevailing levels of

approximately DEM1.80 and JPY155 to the US dollar. The efforts of

the G7 nations, however, were successful only for a few months,

during which time the US dollar somewhat weakened initially but

later on recovered temporarily to DEM1.90 and JPY152.

3.

In the second half of the year, continuing trade tensions

between the US and Japan, the fundamental imbalance in US world

trade, and the alarming US budget deficits made market participants

increasingly nervous over future prospects for the US currency. The

announcement of very large US trade deficits for July and August and

a record deficit of US$17.6 billion for the month of October, firmly

re-established the US dollar on a downward trend. At 31 December,

it stood at DEM1.57 and JPY121.

CONFIDENTIAL