Hong Kong's Exchange Fund Feels the Pain of Strong Dollar

By Fiona Law

HONG KONG--The fund that manages Hong Kong's foreign-exchange reserves registered its weakest gain in three years in 2014, largely due to foreign-exchange losses.

The Hong Kong Exchange Fund, which backs the territory's currency, posted an investment gain of 43.6 billion Hong Kong dollars ($5.62 billion), down 46% from HK$81.2 billion in 2013, the de facto central bank said Monday. The investment return for the fund settled at 1.4% last year, its weakest performance since 1.1% in 2011.

The sharply lower gain came from a HK$52.7 billion loss in foreign-exchange investment and reduced income from equities, which couldn't be offset by the improved performance in bonds, according to the Hong Kong Monetary Authority. The U.S. dollar index climbed 13% in the second half of last year, reflecting the greenback's strength against major currencies amid expectations of tighter monetary policy in the world's biggest economy.

The fund registered a HK$47.3 billion gain in bonds last year, compared with a HK$19.4 billion loss in the year earlier, the authority said.

The HKMA Chief Executive Norman Chan warned that the investment environment this year will be even more "complex and difficult" amid uncertainty at the timing and pace of U.S. interest rate increase, as well as the implementation of quantitative easing in Japan and Europe.

"The recent sharp rise in the [U.S. dollar], big drop in oil prices and the market turbulence following the surprise move by the [Swiss National Bank] to drop the one way peg of the Swiss franc against euro were just some of the more notable manifestations of the market reaction to a very abnormal global financial and macroeconomic environment," he said.

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