GTHT Securities released a research report analyzing the recent strengthening of the US dollar, attributing it to a "dollar shortage" caused by the US government shutdown, hawkish signals from the Federal Reserve, and weakness in non-US currencies. Historically, a stronger dollar has pressured foreign capital outflows from Hong Kong stocks. Under the linked exchange rate system, it may also temporarily impact local liquidity and sectors in Hong Kong. Short-term focus remains on the US government reopening timeline and economic data, while medium-term prospects look promising with incremental capital inflows and high-quality asset aggregation driving Hong Kong stocks toward new highs, particularly in the tech sector.

**Key Drivers of USD Strength** Since late September, the US dollar index has risen, briefly surpassing 100 on November 4, reaching levels last seen in July. GTHT Securities identifies three primary factors behind this trend: 1. **US Government Shutdown-Induced Liquidity Crunch**: Since early October, halted government spending has drained approximately $0.7 trillion in liquidity from the market, exacerbated by ongoing Fed balance sheet reduction. 2. **Fed’s Hawkish Stance Cooling Rate-Cut Expectations**: Post-October FOMC, Chair Powell’s remarks downplaying a December rate cut led to a sharp drop in market expectations, with 10-year Treasury yields rising to 4.17%, bolstering the dollar. 3. **Weak Non-USD Currencies**: The yen weakened amid Japan’s fiscal expansion signals, while the GBP faltered due to soft wage data and potential tax hikes in the UK.

**Impact on Hong Kong Stocks** Foreign capital, sensitive to USD movements, dominates Hong Kong’s market (60% share as of Q3 2025). Historical data shows flexible foreign capital outflows during USD rallies (e.g., -HK$745.7 billion since September), while stable capital saw smaller declines (-HK$46.1 billion). The linked exchange rate system may tighten local liquidity if HIBOR rises, though recent HKD strength near the upper bound has mitigated immediate pressures.

**Short-Term Watchpoints** October’s market correction (Hang Seng Tech fell 15.8%) reflected trade tensions and USD strength. Positive developments include eased US-China uncertainties post-leaders’ summit and attractive valuations (Hang Seng Tech PE at 30th percentile). A potential US government reopening could release pent-up liquidity, while Fed rate-cut expectations (61.5% probability for December) may curb further USD gains.

**Medium-Term Outlook** Hong Kong stocks, trading at discounted valuations, are poised for growth: 1. **Valuation Edge**: Tech sectors offer relative bargains versus A-shares and US peers, with AI-driven re-rating potential. 2. **Capital Inflows**: Foreign funds may rebound on Fed easing, while southbound inflows (HK$1.5 trillion projected for 2025) bolster momentum. 3. **Scarcity Value**: Hong Kong’s AI and biotech assets align with global trends, benefiting from China’s industrial shifts.

**Sector Focus** Tech remains the core theme, with AI narratives gaining traction and easing US-China tensions supporting risk appetite. Innovator pharma firms accelerating overseas expansion and brokers in a bull market also warrant attention.

**Risks**: Delayed policy support, worsening trade dynamics, or slower Fed rate cuts could dampen prospects.