Hong Kong c.bank curbs rise in 'safe haven' HK dollar

HONG KONG (Reuters) - Hong Kong's central bank intervened on Thursday for the first time in nearly a year to stem a rise in the Hong Kong dollar and keep it within official trading limits against the U.S. dollar.

Traders said funds had poured into Hong Kong banks in the past few days as the territory's sound financial system and currency peg to the U.S. dollar were seen as a safe haven, putting upward pressure on the local currency.

"Markets in general are very volatile," said Carlos Cheung, chief foreign exchange dealer at Bank of East Asia.

"Hong Kong is seen as a safe haven as neighbouring countries are quite unstable financially."

The central bank, the Hong Kong Monetary Authority (HKMA), injected HK$3.877 billion (US$500 million) into the market on Thursday afternoon as the Hong Kong dollar was trading at around 7.7540 per U.S. dollar.

The currency is pegged to the U.S. dollar at 7.8, but can trade between 7.85 and 7.75. The HKMA is obliged to keep the currency in that range under an arrangement known as the convertibility undertaking.

"The Hong Kong dollar exchange rate has strengthened to near the strong side of the convertibility undertaking rate, while short-dated Hong Kong dollar interest rates rose to a premium over U.S. dollar interest rates," an HKMA spokesman told Reuters.

"These developments reflect increased demand for Hong Kong dollars. Taking into account market conditions, the HKMA operated within the convertibility zone, purchasing U.S. dollars against Hong Kong dollars," he said.

GLOBAL DOWNTURN

By late Thursday afternoon, the currency was trading at around 7.7539 to the U.S. dollar.

"It's still very near the strong side of the convertibility undertaking, so I wouldn't rule out further injections," said Frances Cheung, a strategist at Standard Chartered Bank.

The Hong Kong currency's appeal as a safe place to park money was underpinned by the U.S. dollar's rise to a two-year high against a basket of currencies on Thursday, analysts said.

Investors have pulled money out of other Asian markets in the past few days, worried about how the region will be affected by a global economic downturn.

Emerging markets generally were perceived as much more risky after it was reported that Pakistan and Hungary sought help from the International Monetary Fund and Argentina nationalized its pension system, seen as an attempt to stave off default.

Pakistan said on Thursday it had not formally asked for a loan facility from the IMF.

"Even Asian currencies with relatively sound fundamentals like the Singapore dollar SGD= and Taiwan dollar TWD=TP have been depreciating this week as fear in emerging markets has increased sharply," said Joe Lo, senior economist at Citigroup.

"Hong Kong's financial system is strong and its currency peg is very stable so it's becoming a safe haven for money in the region."

Fitch ratings agency said on Friday that Hong Kong banks are fundamentally sound and should weather challenging economic conditions.

Lo said the territory's decision last week to guarantee bank deposits may also be helping boost the Hong Kong dollar, although the impact was limited as only customer deposits are guaranteed not interbank deposits.

In offshore trade overnight, the Hong Kong dollar had hit a near one-year high of 7.7516 to the U.S. dollar.

It has stayed on the strong side of its trading band for the past two months as rising risk aversion amid the global credit crisis has discouraged arbitrage trade. Banks' reluctance to lend to each other amid the credit crisis has prompted lenders to sell U.S. dollar positions for Hong Kong dollars to boost liquidity for local operations, analysts said.

Arbitrage traders sell Hong Kong dollars for U.S. dollars to make money on the differential between U.S. and Hong Kong dollar interest rates.

On Thursday, the daily one-month Hong Kong interbank offered rate (Hibor) was fixed higher for the first time in a week at 2.92571 percent. Interbank rates had drifted slightly lower this week after action by the HKMA over the past two weeks to ease tight liquidity as banks were cautious about lending amid the global credit crisis.

The HKMA said the aggregate balance -- the sum of balances on clearing accounts maintained by banks with the HKMA -- would increase by HK$3,877 million to HK$17,958 million on Oct. 27 as a result of the fund injection.

(Additional reporting by Christina Lo)

(Editing by Anne Marie Roantree and Jacqueline Wong)