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Expectations that the US Federal Reserve will raise interest rates next month are already making an impact on the currency front, and which can have a direct effect on Hong Kong through the linked exchange-rate mechanism.

In the past few weeks, the Fed has led many US bankers and economists to believe there would be two to three rate hikes before yearend. Of utmost concern to investors in Hong Kong is how closely they'll have to track US rate adjustments.

Another worry is the appreciation of the local currency in tandem with the US dollar against those of neighboring economies. A strong currency has been widely blamed for undermining Hong Kong's competitiveness at a time of deepening economic recession.

There's also nervousness over possible attacks on the currency link. Such attacks, like those mounted by international speculators shortly after the outbreak of the 1997 Asian financial crisis, could have a devastating impact on the financial market.

Interest rates, undoubtedly, can have the most direct impact on asset prices. Economic analysts reckon there's no compelling reason for Hong Kong to raise interest rates, at least, in the short term, because such a move won't be necessary to deter an outflow of funds.

The city's de facto central bank has said the hot money that flooded into Hong Kong when the US was pursuing a credit expansion program had largely been repatriated earlier this year after the first US interest-rate increase in December 2015. There's no pressing reason for Hong Kong people to park their money in the US or elsewhere, given the strength of the local financial system and the credibility of the linked currency mechanism which is backed by ample reserve funds.

Hong Kong's tourism sector has already taken a beating from an appreciating currency. But its impact on other sectors of the service-oriented economy has remained limited. The fall in external demand can be made up by the increase in fixed asset investment and domestic consumption.

Of course, attacks on the linked currency system can't be ruled out, especially when the economy is seen to be weakening. But, the Hong Kong government has reiterated its resolve to defend the system, and it's backed by $361 billion in foreign-exchange reserves.

(HK Edition 05/27/2016 page1)