Amid the recent clamor for Hong Kong to abandon its currency's 20-year peg to the US dollar, most traders would have staked their last dollar on the HK dollar depreciating against the greenback.
Swayed by the backdrop of a spluttering local economy and nearly five years of deflation, few investors appear to have even considered the notion the HK dollar could appreciate against its US counterpart.
As a result, the currency's strengthening in recent weeks has proved a rude awakening for those who assumed no upside risk existed.
It has also proved very costly for speculators who are estimated to have lost hundreds of millions of dollars after betting the value of the HK dollar would fall, not gain.
Spurred by speculation international pressure for stronger regional currencies, in particular US-led calls for an appreciation of the Chinese yuan, could force an appreciation of the local unit, hot money flooded into the city pushing the HK dollar to its highest level since before 1997.
Belated realization and then rapid attempts by currency traders to reverse their positions also contrived to lift the unit to a six-year high against the US dollar on Sept. 22 at HK$7.705, well above its fixed rate.
The HK dollar has been pegged to the greenback at HK$7.80 to the US dollar since 1983 when the system was adopted to ensure financial stability against a backdrop of political uncertainty about the territory's future.
The peg protects the Hong Kong currency from getting weaker than HK$7.80 to the US dollar but allows it to strengthen.
In recent months there have been mounting calls for the peg to be scrapped, with some analysts blaming it as a key factor behind the more than five years of deflation in the former British colony.
However, senior economist at Bank of East Asia, Paul Tang, said the argument for a weaker Hong Kong dollar has lessened significantly as the economy showed signs of picking up after the SARS crisis earlier this year.
"The pressure on the peg and the calls for the HK dollar to de-link have reduced now," he added.
In recent months, the US administration has turned up the heat on China to abandon the yuan-dollar peg amid complaints by US manufacturers that the yuan is vastly undervalued at a pegged rate of 8.28 yuan to the US dollar, making US goods too expensive for Chinese markets and Chinese exports cheap in US markets.
However, Chinese Premier Wen Jiabao stressed Tuesday China would not let its currency float freely until further financial reforms were in place.
"To keep the renminbi [yuan] stable at an appropriate and balanced level is conducive to the economic stability and development not only of China but also of the region and the world at large," Wen said.
Wen's comments combined with four earlier interventions into the market by the Hong Kong Monetary Authority, in which it sold HK dollars worth a total value of US$360 million, appeared to have smoothed fluctuations in the market -- at least for now.
The HK dollar was trading at HK$7.73 to the US dollar here late on Friday.
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