Share prices on the New York stock market have plunged in heavy trading as investors on Wall Street responded to the extraordinary 10 per cent collapse in share prices in Hong Kong. European markets also recorded heavy losses in a day of nervous trading.
The New York market, however, closed well off its low of 7805.04 and at the end of the day's trading, the Dow Jones Industrial Average was down over 187 points on 7847.77.
There was some relief in the US last night that the New York market fell by just 2.3 per cent, after the massive fall in Hong Kong. But dealers are still very nervous and believe that the Hong Kong market and currency will remain under pressure from speculators. The speculators are convinced that the Hong Kong government will be forced to raise interest rates to defend its currency.
But the Hong Kong financial secretary, Mr Donald Tsang, warned speculators that the former colony has all the means at its disposal to fight off any attack on its currency.
Mr Tsang said the government had drawn on its massive $88.1 billion reserves to defend the Hong Kong dollar on Wednesday and was prepared to do it again. "The first priority is to defend the exchange rate. This is our top priority. We believe it is right to do so," Mr Tsang said.
Hong Kong's financial markets plunged in turmoil and the stock market suffered steep losses for the fourth day running. The Hang Seng Index yesterday plummeted more than 1200 points, its largest one-day fall ever.
The Hong Kong dollar is the last major Asian currency to be firmly pegged to the US dollar. A regional currency crisis, which erupted in July, has broken the link between the Asian currencies and the US dollar.
The Hang Seng index lost 10.41 per cent of its value and rattled the nerves of the most seasoned stock market investors. The Hong Kong dollar also came under attack as the crisis that has hit much of Asia spilled into Hong Kong, widely regarded as one of the region's strongest economies. It fell to HK$7.615 against the US dollar earlier, but recovered to a range between HK$7.7040 and HK$7.7090 last night.
The crisis facing Hong Kong is its most serious since the former British colony returned to Chinese rule in July. While keen to show the world that it would allow Hong Kong to handle its own financial affairs, Beijing has long said it would lend a hand if Hong Kong asked for it.
Mr Tsang said Chinese leaders were worried. "Quite naturally, I think leaders in China are concerned about what is happening here, but so far, (China) has left us . . . to do our own work," he said.
Losses on European markets ranged between 3 and 5 per cent, but the Irish stock market - a minnow in the world context - actually performed comparatively well, with share prices falling by just 0.78 per cent and the value of the market falling by just £280 million. Financial shares took the brunt of the selling pressure with the ISEQ Financial Index falling by almost 2 per cent.
The fall in share prices in London, where £28 billion was wiped off the value of the market, was accentuated by the introduction this week of the new SETS computerised trading system which tends to generate more volatile trading. "We're in a new environment and we are moving closer to Europe," said the head of UK equity trading at one top investment bank in London. "We haven't got the market-makers any more who would have smoothed out some of the peaks and troughs."
The heavy fall in prices in London was more than matched on continental stock markets and the German market suffered its biggest fall this year with prices falling by 4.7 per cent. But the deutschmark benefited as investors used the German currency as the traditional safe haven in time of financial turmoil.
In Paris, the market nosedived by almost 3.5 per cent as French luxury products companies with an Asian presence suffered.
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