The Hong Kong dollar firmed in late Friday trade, with the market viewing the mainland's revaluation of the yuan as a positive move. It was convinced that the territory's currency peg would remain unchanged.

"The yuan appreciation has limited impact on the Hong Kong dollar as HKMA had said that Hong Kong's currency peg will stay unchanged," one trader said.

Some analysts believe that the yuan could rise further in the next 12 months but many players are waiting to see how trading in the currency pans out next week.

The Hong Kong dollar was trading at 7.7703/06 to the US dollar in late trade, up from 7.7783/86 on Thursday afternoon before the mainland announced it revalued the yuan by 2.1 per cent to 8.11 to the US dollar.

Hong Kong's currency had risen as high as 7.7643 overnight in the wake of the yuan revaluation before meeting resistance.

"We are kept at a 30-point range today, narrower than the overnight trade in London," another dealer said.

Speculative pressure on the Hong Kong dollar was expected to die down after the mainland on Thursday revalued the yuan and abandoned its peg to the US dollar in favour of linking the yuan to a basket of currencies.

The Hong Kong government and the Hong Kong Monetary Authority (HKMA) said they had no intention to change the territory's linked exchange rate system, which ties the Hong Kong dollar at 7.75-7.85 to the US dollar.

The system was tightened in May when an upside ceiling of 7.75 was introduced and the currency's floor was moved to 7.85 from 7.8.

Analysts said the Hong Kong market's steady reaction to the mainland's move was a sign of confidence that the refinements to the currency board in May would hold.

The introduction of a ceiling for the currency for the first time was aimed at warding off speculators betting Hong Kong would follow any move by the mainland and let its currency appreciate.

"There is little room for speculation on the Hong Kong dollar," a dealer said.

But the discount on one-year Hong Kong dollar forwards widened further to 390/365 pips on late Friday from 320/300 pips on Thursday before the yuan announcement largely followed the movement of yuan non deliverable forwards.

The one year NDF indicated that the market expected the yuan to rise to 7.7 to one US dollar in the next 12 months.

Deutsche Bank said in a research note that it raised its 12-month appreciation target for yuan to 7.7 from the previous 7.9 and the 24-month target is now at 7.3 yuan.

"We have to wait and see the real movement of yuan next week since it was virtually unchanged today," a trader said.

(HK Edition 07/23/2005 page3)