Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority
The downgrading of US by S&P's did not come as a big surprise. In a way, it reflects the market concern on the determination and ability of the US Government to pursue fiscal consolidation in the medium to longer term.
However, we do not believe the downgrading last Friday would have significant impact on the yields of the US Treasuries. We have observed that on previous occasions when market turbulence and risk aversion occurred, the demand for US Treasuries as safe haven assets actually increased. This was also true during the last two weeks when the US and global stock markets declined rather sharply.
Similarly, the downgrading of US's credit rating by one notch should not affect US dollar's position as a major pricing and settlement currency in international trade and financial markets. In the past, whenever market turbulence happened, even though when it originated from the US, risk aversion activities would help mitigate downward pressure on US dollar exchange rate. Therefore, the downgrading of US's credit rating should not bring about major pressure on US dollar exchange rate in the short run.
As a matter of fact, there were no significant changes in the yields of the US Treasuries and US dollar exchange rate after the markets opened in Tokyo early this morning.
Given the present unfavourable economic and financial conditions in Europe and in the US, we expect that there would continue to be significant market volatilities going forward. It will be crucial that the authorities in Europe and in the US will take further steps to allay the concerns of the market by implementing bold fiscal plans and other appropriate measures. At the same time, Hong Kong should continue to strengthen the resilience of its financial system to cope with such volatilities.
I wish to reaffirm that we remain fully committed to the Linked Exchange Rate System, which has served Hong Kong very well as the anchor for monetary and financial stability since 1983. We have no intention to change the Link.