As safe as the HKD Peg

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One of the enduring pillars of global confidence in Hong Kong and its monetary system is the Hong Kong dollar “peg”, the mechanism by which the HKD v USD exchange rate is fixed at an exchange rate of 7.80 and, since 1983 (the time when it was first introduced to counter the negative sentiment caused by Britain entering into formal negotiations to transfer Hong Kong back to China in 1997) it has withstood the test of various market shocks, speculation and opportunism.

As explained by Reuters “the HKD is pegged in a narrow range of 7.75-7.85 to the U.S. dollar. The Hong Kong Monetary Authority (HKMA) buys and sells the currency at either limit to maintain the range. Buying HKD boosts it by reducing its availability and raises the costs of betting against the currency. Sales do the opposite”.

I remember many times when the HKD peg has been challenged by market speculators, notably George Soros during the Asian Financial Crisis in 1998, and it always creates great media interest and wild speculation amongst financial commentators. When I lived in Hong Kong during the early 90s, it was strange to be living in a booming economy with such a weak currency as a result of the US recession of 1990/91, a time when many locals complained bitterly about their dwindling purchasing power overseas.

We are now going through an unsettling period again with new speculation about US-China trade tensions and, more recently, China’s proposal to impose national security laws on Hong Kong. Depending on who you listen to, the peg is under pressure again and some hedge fund managers are taking major bets against it. Perhaps they know something we don’t but I’ll be very surprised if the speculators win this time!

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