The Hong Kong dollar’s peg to the US dollar will not change despite recent volatility and a “mild erosion” of the US dollar’s dominance, according to John Greenwood, the economist behind the city’s currency mechanism.
Hong Kong’s currency board system acted “as designed” during a tumultuous year for the local dollar, Greenwood said on Tuesday during a briefing in the city.
Earlier this year, a rare liquidity surge from the Hong Kong Monetary Authority’s (HKMA) defence of the currency peg sent Hong Kong interbank rates tumbling in May, causing a divergence in Hong Kong and US interest rates. That divergence triggered carry trades, where investors borrow in low-interest currencies to invest in higher-yielding assets, which pushed the Hong Kong dollar to the weak end of its peg and triggered the HKMA to intervene 12 times between June 25 and August 13.
“Clearly, I think some people are having second thoughts about whether this is an appropriate system to have, whether we could have a more stable system,” said Greenwood, who was in town for the HKMA’s currency board committee meeting. “At the moment, the official view is that there is absolutely no intention to change anything.”
Greenwood’s analysis of the options available formed the basis for Hong Kong’s currency peg in 1983, which was introduced after the Hong Kong dollar slumped amid investor concern at the time over talks between Beijing and London on the return of the city to mainland rule.
