Hong Kong’s US dollar peg explained: history, benefits and risks
As international investors diversify away from US dollar assets and amid the rise of internationalisation of the yuan, there are calls for reviewing the Hong Kong dollar’s peg. Here is what to know about the system. Why is the Hong Kong dollar pegged to the US dollar? The birth of the peg is closely tied to market uncertainties. The currency was once freely traded and in September 1983 slumped by…
Hong Kong's peg to the US dollar has its origins in market instability in 1983, when the currency's value plummeted. The government introduced the peg in October 1983, and adjusted it in 2005 to allow for a small trading band. The Hong Kong Monetary Authority (HKMA) maintains the peg by buying and selling the currency to ensure it stays within a specific range.
This system has benefits, such as providing stability for businesses and capital markets, but also carries drawbacks, including being forced to align interest rates with those of the US Federal Reserve. Some argue that the Hong Kong dollar should be linked to the Chinese yuan, due to the increasing international use of the yuan.
However, the HKMA and Hong Kong's leaders maintain that the yuan is not yet ready for this role, and that the peg to the US dollar remains essential for the city's status as an international financial hub.
Written by urgent.news from SCMP Business's reporting — not their text. Machine-written; read the original for the full account.
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