Hong Kong Dollar to USD

Yesterday saw something quite unusual in the New York trading session. The Hong Kong Monetary Authority bought $715 million (selling HKD) in the FX markets to manage its currency peg, injecting the money into the banking system (and expanding its balance sheet) to prevent HKD from rising above its permitted range. HKMA projects its balance sheet to grow to the end of July, but as Simon Black (of Sovereign Man blog) notes, this could well be the start of a bigger shift - an end to the US Dollar peg..."The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own."

HKMA's balance sheet is surging - HKD demand pressuring peg, thus buying USD (and selling HKD) to manage peg...

It was a different world in 1983.

Michael Jackson invented the Moonwalk. Return of the Jedi opened in theaters across the world. IBM released its most advanced personal computer yet– the XT, with a standard 10 megabyte hard drive.

And after nearly a decade of eratic swings and collapses, the Hong Kong government pegged its currency (the Hong Kong dollar) to the US dollar at a rate of 7.80 HKD per USD.

This was a big move for Hong Kong. The Hong Kong dollar had originally been backed by silver until 1935 when, facing a shortage of precious metals, they pegged it to the British pound.

This made sense in 1935 as the British pound sterling was still (barely) the world’s top reserve currency.

But things changed. In 1972, Hong Kong broke from the pound and adopted a new peg to the US dollar.

This didn’t last either. After just two years, the US government’s rising debt and inflation forced Hong Kong to abandon the US dollar peg.

At that point Hong Kong was well-known and stable… so why bother pegging the currency at all? The HKD floated freely in the marketplace, just like any other currency.

It went well for them at first. But by the early 1980s, the Hong Kong dollar had become much weaker due to jitters over the island’s reunification with China.

Finally, in 1983, they re-established a peg with the US dollar. And at the time, this probably made a lot of sense.

In 1983, Fed Chairman Paul Volker had established tremendous international credibility, both for the US dollar as well as the Federal Reserve. And most of all, Hong Kong was in need of a strong anchor.

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