Hong Kong Dollar VS USD Dollar

Historically, the Hong Kong dollar has not been worth putting on a trader’s radar. The currency trades between a narrow band of 7.75 to 7.85 HKD per U.S. dollar and the Hong Kong Monetary Authority has maintained the peg since 1983. Interest rates also are set to match the Fed. Before that, the Hong Kong dollar had pegs linked either to the British pound or U.S. dollar, but the value was readjusted periodically with economic conditions. As a result, the lack of movement in the Hong Kong dollar has made it not much different than holding U.S. dollars or trading U.S. dollar pairs.

That could be changing. With the diverging paths of the United States and emerging Asian economies, the peg might not be as stable as it has been for the past 30 years. Asian economies still are growing while the U.S. continues to stagnate economically.

To maintain the peg with the U.S. dollar while the Federal Reserve has held interest rates at 0% and printed trillions of dollars through quantitative easing programs, the Hong Kong Monetary Authority had to match the low rates even if they had adverse effects on inflation. A housing bubble and a high inflation rate of 3.8% (peaked at 7.9% in the summer of 2011) have been the byproducts of importing U.S. inflation. Because of pressure from a weakening U.S. dollar vs. Asian currencies, the Hong Kong Monetary Authority has needed to intervene to defend the peg since Oct. 20. Because of intervening on a regular basis with injections of more cheap money into the economy, inflation pressures have risen.

Will the peg hold?

When addressed with the concerns of higher inflation, the Hong Kong Monetary Authority reassures markets about its commitment to the U.S. dollar peg. However, recently it started to show opposition toward Fed policy. Defending the peg has devalued the Hong Kong dollar vs. the renminbi and other nearby Asian currencies. With 43% of imports coming from China, currency depreciation has resulted in inflation. Cheap money in Hong Kong also has driven “hot money” from mainland China to speculate in the real estate market and create bubble-like valuations in the housing market. Unless the Fed drastically changes course on interest rates, inflation in Hong Kong may reach the point where defending the peg may result in social unrest or other political pressure.

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