Macroscope | Should Ukraine war fallout prompt Hong Kong to rethink its currency peg to the US dollar?
- Washington’s move to freeze Russia’s central bank assets has cast doubt over the once unquestionable safety of US Treasuries holdings
- Should dollar supremacy seriously begin to wane, it may be time to re-evaluate the over three-decade-old Hong Kong dollar peg
Such an assertion usually implies revisiting arguments about whether the economic mainlandisation of Hong Kong makes it appropriate to retain a link between the Hong Kong dollar and the US dollar. But perhaps the real issue is whether the 2022 greenback has the same characteristics as it did in 1983 when the peg was adopted.
Back on October 17, 1983, the Hong Kong dollar was pegged at HK$7.80 to the US dollar, with the HK$7.75-7.85 band being an innovation that was unveiled in 2005.
It might seem odd to even suggest that the US dollar, as it was perceived in 1983, is different from that of 2022, but currencies are more than banknotes. Currencies are a reflection of the financial architecture that underpins their value and the legal framework within which they exist.
The post-1945 US dollar, which was fully convertible against gold at a price of US$35 an ounce, had already undergone a metamorphosis in 1971 when the Nixon administration, realising that the United States could no longer realistically meet its obligations, unilaterally suspended the greenback’s convertibility, resulting in a devaluation of the US dollar on the foreign exchanges.
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Why Hong Kong pegs its currency to the US dollar
Fast forward to Riyadh in 1974, when a Saudi-US accord resulted in Saudi Arabia agreeing that its oil exports would be priced only in US dollars with the proceeds invested in US Treasuries. In return, the US agreed to buy Saudi crude and to provide military support for the kingdom. The petrodollar was born.