Hong Kong’s US dollar peg explained: history, benefits and risks

As global investors shift away from US dollar assets, Hong Kong is tied to the US dollar to maintain a stable exchange rate As international investors diversify away from US dollar assets and amid the rise of internationalisation of the yuan, there are calls for reviewing the Hong Kong dollar’s peg. Here is what to know about the system. The birth of the peg is closely tied to market uncertainties. The currency was once freely traded and in September 1983 slumped by 48 per cent to a record low of HK$9.60 per dollar when a crisis of confidence occurred as the Chinese and British governments began negotiations for the 1997 handover. Hong Kong pegged its currency at HK$7.80 per dollar on October 17, 1983, under the Linked Exchange Rate System, in order to stop the swing. A trading band was then introduced in May 2005 to allow the local currency to swing between HK$7.75 and HK$7.85. The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, will intervene in the market to ensure the currency trades within the range.

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