Hong Kong's Currency Inflicts Plenty of Pain

In Hong Kong, a city notorious for the gyrations of its markets, the local currency is always worth about the same as the U.S. dollar. To ensure stability in anticipation of the British colony’s return to Chinese rule in 1997, the government linked the Hong Kong dollar to the greenback at a rate of about 7.8 Hong Kong dollars to one U.S. dollar. Since Beijing resumed control over Hong Kong, the rate has remained in place. That’s helped Hong Kong weather the Asian crisis, the SARS epidemic, and the Great Recession.

The downside to the policy, known as the peg, is that Hong Kong interest rates must follow the lead of the Federal Reserve to avoid big discrepancies between the two currencies. With Fed Chairman Ben S. Bernanke’s pledge to keep borrowing costs at record lows until mid-2013, the peg is proving painful for Hong Kong.