Hong Kong’s dollar peg is an important bulwark against volatility

Whenever interest rates climb, so do calls to unpeg the Hong Kong dollar from the US currency. With US interest rates elevated and the Hong Kong dollar hitting a 3½-year high against the American dollar earlier this month, the debate has flared up again. Some argue that the dollar peg limits Hong Kong’s monetary flexibility and burdens the local economy with high borrowing costs.

These concerns, while understandable, miss the bigger picture. The peg has given Hong Kong stability, predictability and credibility. These are qualities that matter far more in the long run than the short-term fluctuations in interest rates.

The Hong Kong Monetary Authority, the city’s de facto central bank, has made its position clear. It recently reaffirmed its stance that “we have no intention, and we see no need to change” the peg.

For over 40 years, this system has been the foundation of Hong Kong’s status as an international financial hub, providing stability for trade and investment even in uncertain times. Scrapping it now would not just shake economic confidence, it could also jeopardise Hong Kong’s hard-earned reputation as a reliable global hub.

As an investor, I believe the dollar peg eliminates one of the most significant risks in investment: currency volatility. For a financial hub such as Hong Kong, where capital flows freely, this is a vital consideration. By keeping the Hong Kong dollar stable against the US currency, businesses, investors and even households can make financial decisions without worrying about sudden exchange rate shocks.

Without the peg, the city would have to contend with unpredictable swings in its currency, which would inevitably affect its competitiveness. A floating currency might sound appealing in theory, but for an open economy such as Hong Kong, it is likely to lead to higher inflation and greater instability.

  

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