Nation

Is Hong Kong's Dollar Peg on the Edge? Why It Might Be the Best Choice Yet!

2025-06-24

Author: Ying

As Hong Kong's dollar peg to the U.S. dollar faces renewed scrutiny, the chatter about its potential demise is mounting. Critics point to the widening gap in overnight interest rates between Hong Kong and the U.S., reigniting debates on whether it's time to abandon a currency system that's stood strong for 41 years. But what if sticking with the peg is ultimately the safest bet?

The Hong Kong Monetary Authority (HKMA) has a critical task: aligning local interest rates with U.S. ones to maintain the currency's value. Currently, while U.S. overnight rates soar to around 4.3%, Hong Kong's remain stagnant, nearly touching zero. However, this isn’t a sign of impending disaster; it’s a sign that the system is functioning as designed. Until the peg is truly threatened, the HKMA sees no need to intervene.

The importance of maintaining the U.S. dollar peg extends beyond currency stability—it supports Hong Kong’s unique position as a gateway for Chinese companies seeking to raise funds in dollars. Switching to a yuan peg—a popular alternative discussed in finance circles—could jeopardize this status, creating a vast offshore yuan pool that would unsettle Beijing.

For the many businesses listed on the Hong Kong Stock Exchange, this peg is crucial for their valuations and access to capital. Moreover, Hong Kong's Basic Law mandates that its currency remain freely convertible, reinforcing the importance of sticking to the dollar.

Critics argue that the existing pegged system limits monetary policy control, yet abandoning the peg could inflict more harm than good. The low overnight rates, crucial for mortgage benchmarks, offer some relief to locals feeling the crunch of an ailing real estate market. Recent insights suggest this could even help stabilize property prices as the market gradually heals.

Some suggest a trade-weighted currency basket, like Singapore’s, could be a solution, but experts warn this could introduce volatility and complicate monetary control. Historical naysayers, including well-known hedge fund managers who've bet against the peg, have been proven wrong time and again, and there's little reason to think new challengers will succeed.

In this tumultuous financial landscape, the U.S. dollar peg might not just be the least bad option; it could be the most prudent choice for Hong Kong's economic future.