Hong Kong should guard against the risks to financial stability posed by inflation and the expected easing of US monetary policy, which might stimulate the build-up of leveraged positions and asset-price inflation, the Exchange Fund Advisory Committee Currency Board Sub-Committee says.

It said today global financial markets have been volatile recently and have weakened due to low US data, persistent credit concerns and central banks' highlighting growth risks.

It said US credit problems could affect East Asian economies through financial channels and dampen confidence in the region's markets leading to capital outflows.

It said it has no strong reason to expect the dollar to be in a long-term decline, although market dynamics could make US assets less attractive and lead to a further depreciation of the dollar in the short term.

The committee also issued the report on currency board operations for January 5 to February 4. The Hong Kong dollar exchange rate was stable during the period. Interbank interest rates eased, while their negative against US dollar interest rates showed a diverse pattern. The monetary base grew slightly from $319.71 billion to $344.28 billion.