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Macroscope | Recent volatility aside, Hong Kong’s dollar peg is here to stay
Aidan Yao says Hong Kong has plenty of ammunition to defend the peg, if necessary, and there are currently no real alternatives that are compatible with its status as a financial hub
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The Hong Kong dollar-US dollar exchange rate hit the weak side of its 7.75-7.85 currency band on April 13, prompting the Hong Kong Monetary Authority to intervene in the market multiple times to support the currency.
Even though market interventions by the HKMA are not uncommon historically, previous interventions, in 2008-09, 2012, and 2014-2015 were all in response to excessive currency strength, requiring the HKMA to sell Hong Kong dollars.
What we are observing now is the reverse: the Hong Kong dollar has fallen to the weak side of its trading range, forcing the central bank to intervene to support its value.
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Being one of the few remaining fixed-exchange regimes in the world, these developments have created renewed chatter about the vulnerability of Hong Kong’s peg.
Before we go into regime sustainability, here’s some background on how the Hong Kong dollar peg works.
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To maintain a rigid peg between the Hong Kong dollar and US dollar, Hong Kong has to give up its ability to set monetary policy while maintaining an open capital account. This means domestic interest rates are the primary shock absorbers in the Hong Kong dollar economy.
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