THE HONG KONG Monetary Authority faces a conundrum that you might think it should never have encountered under our currency board system: What is an appropriate level for the exchange rate of the Hong Kong dollar to the US dollar?
Simple, you say. The official peg rate is HK$7.80 to the US$1 and this is the appropriate level for the exchange rate. Why should it be anything else?
It is the line many people have taken since the Hong Kong dollar's recent strength against its peg provided a reminder that the HKMA is obliged to intervene when our currency is weaker than the peg rate but not when it is stronger, a reminder that actually came as news to many observers, yours truly included, I must confess.
In fact, the HKMA also prefers a rock steady HK$7.80. For reasons that I shall not bother to go into here (in part because I cannot claim to understand them all) it was not so in the mid 1990s. We had strength against the peg then too.
However, the HKMA was always resolved to end that anomaly. It decided not to do so in 1997 and 1998 because a weakening of the rate to its peg level might exacerbate worries during the Asian financial crisis that the peg would not hold but, as the chart shows, in 1999 the HKMA orchestrated a steady move back to HK$7.80 and then froze the rate there until we had the sudden bout of strength two months ago.
The official reason for allowing this departure from what was clearly a policy decision is that it does no harm to remind speculators occasionally that they can lose too if they take a view against the Hong Kong dollar.
Perhaps, say other observers, but if you toy with the exchange rate you may also weaken faith in the currency board mechanism. Best allow no variance either way. Best intervene when the market rate is strong against the peg as well as when it is weak.