HK Dollar Peg: A Linked Exchange Rate System

The Hong Kong Dollar (HKD) is pegged to the US Dollar (USD) through a Linked Exchange Rate System. This means that the HKD is allowed to fluctuate within a narrow band of 2.95% around its fixed parity with the USD.

The Linked Exchange Rate System was introduced in 1983 to maintain the stability of the HKD. The system allows the HKD to trade within a specific band, ensuring that it remains pegged to the USD.

The Hong Kong Monetary Authority (HKMA) manages the exchange rate system and ensures that the HKD remains within the allowed band. The HKMA also intervenes in the foreign exchange market to maintain the stability of the HKD.

The Hong Kong dollar system is a unique one. It's been pegged to the US dollar since 1983, a move made to stabilize the currency and protect Hong Kong's economy from speculative attacks and inflationary pressures.

The peg has proven highly effective, providing a stable monetary environment that has allowed Hong Kong to thrive as a global financial hub. This has been a key factor in the city's economic success.

The Linked Exchange Rate System (LERS) is the mechanism that ties the HKD to the USD at a fixed rate, which is currently around 7.75, the lower band of the currency pair.

The Hong Kong Dollar Basket Currency is an interesting concept that has been explored in the past. The Monetary Authority of Singapore (MAS) maintains the Singapore Dollar within an undisclosed band, which makes it less transparent and predictable compared to the Hong Kong Dollar.

Pegging the Hong Kong Dollar to a basket of currencies, representing its most important trading relationships, could be a viable option. The overall basket could be either disclosed or undisclosed, but it's essential to consider the challenges that come with it.

China represents 59.87% of all of Hong Kong's trade, making it the most significant trading partner. A large chunk of the foreign exchange reserves would need to be denominated in Chinese Renminbi, but the Chinese Yuan is not freely convertible, and China's monetary policy is less predictable and transparent than the US.

The challenge with the Chinese Yuan is that it captures a relatively low percentage of global trade compared to the US Dollar. Therefore, its general acceptance in global markets in the form of trade involvement and foreign exchange reserves is yet to be established.

Alternatively, the HKMA could consider pegging the Hong Kong Dollar to the Chinese Renminbi, but this would require a high percentage of foreign exchange reserves to be denominated in Renminbi. China has been watching recent global developments and is trying to de-dollarise, which could impact the stability of the US Dollar.

China's gold holdings are currently 1,948 tonnes, but it's believed that the actual holdings are much higher. China has been producing a significant amount of gold, with over 6,830 tonnes mined since 2000, and most of it is state-owned.

The Shanghai Gold Exchange (SGE) has seen a significant amount of gold withdrawals since 2008, but not all gold entering China is accounted for in SGE withdrawals. The People's Bank of China (PBOC) has been purchasing 12.5kg bars, which are not traded on the SGE, and their purchases are not declared.

The Hong Kong Monetary Authority (HKMA) introduced the Linked Exchange Rate System (LERS) in 1983 to peg the HKD to the USD at a fixed rate.

This move was designed to stabilize the currency and protect Hong Kong's economy from speculative attacks and inflationary pressures.

The HKMA has provided an explicit convertibility undertaking to all licensed banks in Hong Kong, converting HK dollars in their clearing accounts into US dollars at the fixed exchange rate of HK$7.75 to US$1 since 5 September 1998.

The convertibility rate has converged with the rate applicable to the issuance and redemption of Certificates of Indebtedness at 7.80 on 12 August 2000.

The HKMA announced three refinements on 18 May 2005 to remove uncertainty about the extent to which the exchange rate may strengthen under the Linked Exchange Rate System.

Here are the three refinements made by the HKMA:

The HKMA shifted the weak-side Convertibility Undertaking by 100 pips on every Monday starting with 7.81 on 23 May 2005 until it reached 7.85 on 20 June 2005.

The Hong Kong dollar has been trading near its upper band of 7.85 against the greenback, due to a popular "carry trade" strategy. This involves borrowing the Hong Kong dollar at a cheap interest rate and selling it to buy the higher-yielding US dollar.

The currency pair has recently retreated back down toward its lower band of 7.75, thanks to a general softening in the US dollar and intervention by the HKMA.

Markets are steady, with little appetite amongst traders to bet that the Hong Kong dollar could break its peg with the greenback.

The Hong Kong dollar, or HKD, has been trading relatively steadily. It's currently hovering around 7.75 per US dollar, just one pip away from the strong end of its trading band.

A recent carry trade strategy involving the HKD has lost steam, as the US dollar has softened. This has pushed the currency pair back down toward its lower band of 7.75.

The Hong Kong Monetary Authority, or HKMA, has intervened to stabilize the currency. This intervention has helped to keep the HKD from breaking its peg with the greenback.

HSBC Holdings Plc has been in the news due to its business ties with China. The bank's Asia Pacific chief executive officer, Peter Wong, signed a petition supporting Beijing's decision to limit Hong Kong's autonomy.

Ackman's view on Hong Kong's peg is that it no longer makes sense for the city. He's been vocal about this on Twitter.

He cites a recent opinion piece by Richard Cookson, head of research at Rubicon Fund Management, which suggests that the peg is unsustainable due to a surge in debt, falling asset prices, and a weakening economy.

Ackman's hedge fund has taken a big short position against the Hong Kong currency, using put options to limit his risk. This allows him to sell at a fixed price on a specified date if the peg breaks.

The potential reward is huge, with some estimates suggesting a payoff of up to 200-to-1 if the peg snaps.

The Hong Kong dollar peg has provided many benefits, but it's not without its challenges. One major criticism is that it limits Hong Kong's monetary policy flexibility.

The HKD is tied to the USD, so the Hong Kong Monetary Authority (HKMA) must follow the interest rate policies set by the US Federal Reserve, even if they're not ideal for Hong Kong's economic conditions. This can lead to higher borrowing costs for businesses and consumers.

For example, if the US raises interest rates to combat inflation, Hong Kong must follow suit, even if its domestic economy isn't experiencing the same inflationary pressures. This can potentially slow economic growth.

The peg also makes Hong Kong's economy vulnerable to speculative attacks. During times of global economic uncertainty, speculators may attempt to profit by betting against the HKD, forcing the HKMA to intervene in the currency markets to defend the peg.

Hong Kong's economy actually needs lower interest rates to help boost growth, but it has to mirror the US's high interest rates. This has been a problem in the past, such as during the 1997 Asian financial crisis.

The Hong Kong dollar has a unique history that's worth exploring. In 1983, the currency board system was adopted as a response to the Black Saturday crisis, pegging the domestic currency against the US dollar at an internal fixed rate of HK$7.80 = US$1.

This system was made possible by the Hong Kong Monetary Authority (HKMA), Hong Kong's de facto central bank, which authorized note-issuing banks to issue banknotes. The HKMA guarantees to exchange US dollars into Hong Kong dollars, or vice versa, at the rate of 7.80.

The Hong Kong dollar is backed by a massive foreign exchange reserve, over 7 times the amount of money supplied in circulation, which is about 48% of Hong Kong dollars M3 at the end of April 2016.

In 1983, the Black Saturday crisis led to the adoption of the linked exchange rate system in Hong Kong on October 17th.

The Hong Kong Monetary Authority (HKMA) was established as the de facto central bank, authorizing note-issuing banks to issue banknotes.

These banks are required to have the same amount of US dollars as the banknotes they issue, ensuring a direct link between the two currencies.

The HKMA guarantees to exchange US dollars into Hong Kong dollars, or vice versa, at the rate of 7.80 HKD = 1 USD.

This mechanism helps maintain a stable market rate, allowing the Hong Kong dollar supply to adjust accordingly.

The Hong Kong dollar is backed by a significant foreign exchange reserve, which is over 7 times the amount of money supplied in circulation.

At the end of April 2016, this reserve accounted for about 48% of Hong Kong dollars M3.

The Hong Kong dollar's chances of breaking its peg are still a long shot, but it's not impossible. It's got history on its side, having never broken the peg in its almost 40-year existence.

The Hong Kong Monetary Authority (HKMA) has a significant war chest to defend the peg, with $417 billion in foreign currency reserves. This is a substantial amount, and it's unlikely that any hedge fund or speculative investor could go up against it.

China's central bank could provide additional US dollars if needed, and it has the world's largest foreign-exchange reserves at over $3 trillion. This is an enormous amount of firepower that would make it difficult for anyone to challenge the peg.

Hong Kong's financial secretary has sent a stern warning to speculators, telling them they'd lose if they bet against the Hong Kong dollar. This suggests that the authorities are confident in the peg's stability.

The architect of Hong Kong's dollar peg has also stated that speculation against the Hong Kong dollar always fails, thanks to the city's currency board. This is a reassuring message for those who believe in the peg's strength.

It's worth noting that Bill Ackman has previously bet against the Hong Kong dollar peg and lost, and even George Soros, who famously broke the Bank of England, has also lost a bet against the peg. This shows that even experienced investors can be wrong about the peg's stability.

The Hong Kong dollar's peg to the US dollar has been a cornerstone of the city's economic stability for decades. However, this stability is not without its challenges.

The peg is maintained through a currency board system, which requires the Hong Kong Monetary Authority (HKMA) to back every Hong Kong dollar with a corresponding amount of US dollars in reserve. This system has kept the Hong Kong dollar stable against the US dollar since 1983.

The HKMA has a significant amount of foreign exchange reserves, valued at over $400 billion, which helps to maintain the peg. This reserve is a testament to the city's economic stability and its ability to weather external shocks.

However, the peg also means that Hong Kong's monetary policy is effectively set by the US Federal Reserve. This can be a source of uncertainty for Hong Kong's economy, particularly if the US economy is experiencing significant fluctuations.

Hong Kong's economy is highly dependent on trade with China, and the peg can make it difficult for the city to respond to changes in the Chinese economy. This can lead to a loss of control over monetary policy and make it harder for the city to implement policies that benefit its own economy.