Why hk dollars pegged to us dollar

Beyond the technicalities of the law, Hong Kong is more than able to defend its currency even if Washington seeks to limit its ability to buy dollars, Amundi analysts say. Analysts point out that banning Hong Kong from buying up U. It will have limited impact if sanctions are on individual institutions, while it can be "highly damaging" if extreme approaches are adopted.

DBS analysts said: "Given Hong Kong's importance as the third largest forex centre and its status as an international financial centre closely integrated with the global economy and financial system, it is improbable that the US would deny Hong Kong access to the USD clearing system. Demand for the Hong Kong dollar has surged this year, despite fears the peg could be threatened on the back of those U. The IPO market in greater China has been red hot this year , bucking the declining trend in the rest of the world.

According to data from EY, Hong Kong and Shanghai markets drove up the number of deals as well as total amount raised. Skip Navigation. Key Points. The top advisors of U. Focussing on the risk of a depreciation, some back-of-the-envelope calculations illustrate that the likelihood the peg will be overrun must be very low, at least if the past is a guide to the future.

To assess the credibility of the currency board, a simple technique can be used. The test involves computing the range around the USD interest rate for a given maturity that is compatible with the currency board remaining in force. Investors will only be willing to borrow or lend at HKD interest rates outside that range if they believe that the peg may collapse during the period defined by the maturity of the interest rate considered.

Between and , the HKD interest rate was below the range, indicating that investors believed the HKD might strengthen above 7. The cause of this was the appreciation of the renminbi against the USD from the summer of onward, which fuelled speculation that the HKD peg might be switched to the renminbi and lead to an appreciation of the HKD against the USD. This illustrates the two-sided risk to the HKD peg. Between and , the month HIBOR rate was generally just inside the range, implying that investors believed the peg would remain unchanged.

But in February , the HIBOR rate rose briefly above the upper limit of the interest rate range, implying that some investors grew concerned that the peg might collapse. However, it recovered quickly and is now well inside the range. The following Figure shows the same calculation, but using year yields. The interest rate range is much narrower in this case, for the reasons explained above. Interestingly, the year HKD yields are in this case always below the range, except in March when they are just inside the range.

This suggests that market participants attached little weight to the risk of the currency board being broken. There are two main conclusions of the analysis. First, with the currency board having remained unchanged for 38 years, it is clear that the likelihood of a collapse of the peg must on average have been very low, perhaps a fraction of a percent per annum. Had the probability been materially higher, one would have expected to see one or several episodes in which the currency board was overrun.

Second, the HK dollar peg appears highly credible to market participants. If, and when, the HKD hits either the upper or lower bound, the HKMA, which acts as the de facto central bank, intervenes to stabilize the currency.

This trading band versus the USD has been in place since , although the upper and lower limits have been adjusted periodically. One notable attempt was made by legendary hedge fund manager George Soros in The HKD is the ninth most traded currency, and because it is pegged to the U. Established in , the Hong Kong Monetary Authority is the central bank of the island and acts to control inflation and maintain the stability of the Hong Kong dollar HKD and of the banking sector through its monetary policy.

One of the key roles of the HKMA is maintaining currency stability. The fixed exchange rate system seeks to maintain parity with the USD within a tight range, allowing HKD note-issuing banks to issue new banknotes only when they deposit an equivalent value of U. Banknotes are then run through a government exchange fund that holds U. Under capital control laws, a bank can only use HK dollars if it has the equivalent value of U.

Hong Kong Monetary Authority. Accessed June 11, Yahoo Finance. Monetary Policy. International Markets. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.

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