The International Monetary Fund said Tuesday it supports Hong Kong's decision to maintain its currency peg with the US dollar but warned of further volatility in the exchange rate system.

People walk past a money changer in Hong Kong in October 2007. The International Monetary Fund has said it supports Hong Kong's decision to maintain its currency peg with the US dollar but warned of further volatility in the exchange rate system.(AFP/File/Mike Clarke)

It said the peg system has coped well despite the large stock market issues last year and speculative pressures when the Chinese yuan-dollar exchange rate crossed the Hong Kong dollar linked rate.

"From a competitive perspective, the real value of the Hong Kong dollar appears to be in line with economic fundamentals," the IMF said in a report.

However, the IMF warned market volatility and uncertainties, including those regarding capital inflows from China and timing and the size of future initial public offerings (IPO), could persist.

The IMF therefore advised Hong Kong authorities to consider looking to improve the management of liquidity within the financial system.

Hong Kong's currency peg came under pressure in the past few weeks as huge demand for the Hong Kong dollar increased with investors wanting to buy shares of companies holding IPOs in the city such as Alibaba.com, China's business-to-business web site.

The de facto central bank, the Hong Kong Monetary Authority (HKMA), last month sold more than 9 billion Hong Kong dollars defending the peg.

The HKMA's intervention has given rise to speculation the Hong Kong government may abandon its 24-year currency peg, under which the Hong Kong dollar is allowed to trade within the 7.75-7.85 per dollar band.

The HKMA intervenes by either selling or buying Hong Kong dollars once the band is breached. But HKMA Chief Executive Joseph Yam has denied there is such a plan to let go of the peg or to widen the band.

The IMF also said slower growth in the US and Europe may slow Hong Kong's economic growth to less than five percent in 2008, below the 5.5 to 6.0 percent forecast for 2007.