hong kong dollar interest rates at the longer end of the yield curve. pain of adjustment 26. there is no doubt, however, that the discipline of the currency board system requiring rather harsh adjustments through interest rate changes means that there are innocent parties who may rather unfortunately be affected. i am conscious of the plight of, for example, the businessmen who happened to have interbank rate related loans due for interest rate fixing on 23 october 1997, or the home mortgage payers who have now to live with a mortgage rate, after two increases, which is 150 basis points higher than before, or those who have been investing their life long savings in the stock market, the property market and other asset markets, seeing these markets fall under the influence of higher interest rates. although some consolidation has been overdue in these asset markets which had overshot as a result of irrational exuberance, when they do fall sharply our exchange rate link with the us dollar inevitably would be blamed as the culprit, at least when everybody was in the heat of it all. 27. thankfully, it is perhaps in the nature of human beings that even the innocent parties who were unfairly hurt are capable of appreciating the big picture and rationally assessing what the alternative might be. interest rate volatility is the price to pay for a stable exchange rate. clearly it would not be in their interest for hong kong to get involved in the process of competitive devaluation of others in the region and suffer even higher interest rates. and why should we, given that our competitive position, as very much a service oriented economy, is not really very sensitive to exchange rate changes? the currencies of the asian economies, other than the mainland of china, have recently been on a free fall. i am sure even the international monetary fund ( imf ) is surprised by the extent of the devaluation seen in the asian currencies after they were floated. 28. all concerned might have underestimated the effect of a general realization of the need for hedging when a currency moves from a fixed exchange rate system into a floating exchange rate system. it has now become quite clear that there has been overshooting in the depreciation of some of the asian currencies. it must be doubtful if these very large depreciations are necessary for correcting the imbalances in these economies. there are economic and financial problems that needed to be put right, but the plunge in their cu

mr. yam gives a keynote address on the hong kong dollar link keynote address by the chief executive of the hong kong monetary authority, mr. joseph yam, at the hong kong trade development council, financial roadshow in tokyo on 3 / 3 / 98. introduction 1. i am honoured to be delivering the keynote address of this financial roadshow of hong kong. i shall, as you are aware, be talking about the hong kong dollar link. the hong kong dollar has been linked to the us dollar at a fixed exchange rate since october 1983. notwithstanding what must be the worst financial turmoil in the history of asia in recent months, and an abundance of events which might have undermined confidence on the hong kong dollar in the past fourteen and a half years of the existence of the fixed link, the exchange rate has remained very stable. indeed, the hong kong dollar is one of the two major currencies in the asian region that have not been affected by the recent tidal wave of devaluations, the other being the renminbi ( rmb ) of the mainland of china. furthermore, it is the only freely convertible currency in the region that has survived the turmoil unscathed. 2. there has been much scepticism expressed on the hong kong dollar ’ s link with the us dollar over the years and in particular in the past few months when one after another the asian currencies tumbled. indeed, to some, the hong kong dollar increasingly sticks out like a sore thumb, but to others it is being seen increasingly as a pillar of stability in financial markets in the asian region and an example of financial prudence. i hope you belong to the latter group of people rather than the former, but i fear that i may be expecting too much, for indeed it is quite natural when you do not have the chance to examine in detail an apparently controversial matter to be sceptical about it rather than to hang your faith in it. but my task today is, so to speak, to try and win you over. exchange rate policy 3. let me start with hong kong ’ s exchange rate policy. here one is often attracted by the simplistic argument that hong kong, which prides itself as the freest economy in the world, should best operate with a freely floating exchange rate. i obviously do not subscribe to that view. hong kong, as you all know, is a highly externally oriented economy. almost all our daily needs are imported, including