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Opinion
Richard Cookson

Pressure on the Hong Kong Dollar Peg Keeps Building

The social and economic costs of maintaining the currency’s link to the greenback may be getting too great to continue bearing.  

Will Hong Kong’s currency hold? 

Will Hong Kong’s currency hold? 

Photographer: Paul Yeung/Bloomberg via Getty Images

I wrote in April that the economic and social costs of maintaining the Hong Kong dollar’s peg to the US dollar was becoming untenable and may need to be abandoned. The pressure I described has only grown and is now probably greater than anybody outside of the Hong Kong Monetary Authority - which took issue with my original analysis - realizes.

The HKMA has a mandate to keep the currency trading in a range of HK$7.75 to HK$7.85 per US dollar. The current band was set in 2005 and has never been broken. When it gets too close to either end of the band, the HKMA intervenes, either by buying or selling the city’s currency. As the chart below shows, the currency has traded at the extreme weak end of the range for most of the year, pressured by the rising US dollar. That pressure has subsided somewhat recently as interest-rate expectations have eased a bit. But this is only likely to be short-term relief, because the social and economic costs of defending the peg are huge. The Hong Kong dollar peg is like being on the gold standard, and like the gold standard the frailties of such mechanisms are always social and economic.