A virulent strain of influenza, both human and monetary, is likely to weigh on share prices in Asia over the balance of this week, as Hong Kong and China struggle with spreading sickness from a new superbug and weakness in the U.S. dollar.
While markets in Asia shrug off any nuggets of good news from the U.S., and energy and food costs spur stifling inflation, the pressure is building to get away from the sliding greenback, especially as Bear Stearns (BSC) falls victim to a spiraling economic crisis. In Hong Kong, a building focus is revolving around the politically painful, but increasingly economically viable, question of whether to scrap the Hong Kong dollar "peg".
"The Hong Kong dollar link is considered almost sacrosanct within the economy," writes Sean Darby, head of Asian strategy for Nomura Bank in Hong Kong, in a research note this week. Darby adds however that it is increasingly difficult for Hong Kong and China to control inflation with the currency in place.
The Hong Kong dollar is currently pegged at HK$7.8 to one U.S. dollar, while China's currency, the yuan, is pegged more broadly against a dollar-weighted basket. Traditionally, the peg has helped create the huge export and financial market growth that both places are famous for today. As the value of the U.S. dollar has declined, however, controlling inflation and managing profit margins has become a tougher task for many of Hong Kong and China's largest companies.With $200 billion of U.S. Treasuries being loaned out to cash-strapped mortgage-debt holders, China is finding little use for its dollar-weighted managed currency peg too, as the value of its giant $1.5 trillion holdings looks to be threatened over the longer term. "In China,