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The Hong Kong dollar strengthened on Friday as news of China's plans to diversify its foreign exchange reserves pressured the US dollar. The Hong Kong dollar rose to as high as 7.7830 to the US dollar before pulling back to 7.7837/39, but still stronger than Thursday's local close of 7.7847/48.
"The market reacted to Zhou's comments. We heard some selling in the spot and forwards markets from two US houses," one trader said. The local currency is linked to the US dollar and is allowed to trade between 7.75 and 7.85 to the US currency. The discount on one-year Hong Kong dollar forwards widened to 885/875 pips from 865/850 pips late on Thursday.
The greenback lost ground against major currencies after China's central bank chief Zhou Xiaochuan said the country had a clear plan to diversify its US $1 trillion in foreign exchange reserves. On Friday, Zhou said such diversification would be across different currencies and investment instruments in emerging markets.
Dealers said continued speculation that China might be about to let its currency to appreciate at a faster rate also supported Asian currencies, including the Hong Kong dollar.

Copyright Reuters, 2006

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