What’s Pulling at the Hong Kong Dollar’s Peg

Pegged to the U.S. dollar since 1983, the Hong Kong dollar is usually a dull currency. Except when it isn’t. While its trading band of HK$7.75 to HK$7.85 per U.S. dollar, set in 2005, has never been broken, it keeps getting tested. That forces the Hong Kong Monetary Authority, the de-facto central bank, to follow its mandate and intervene, raising questions about how long this can continue and the implications for Hong Kong’s wider economy.

Often it’s interest rates, especially when local ones don’t move in tandem with the U.S. For example, when interbank rates on the Hong Kong dollar -- known as Hibor -- remain elevated as the Federal Reserve reduces borrowing costs, it becomes more attractive for investors to buy the Hong Kong currency against the greenback. The gap between Hibor and the U.S. currency’s Libor has been around the widest since 1999 since March, helping to push the Hong Kong dollar to HK$7.75 for the first time since early 2016. That prompted the HKMA in April to sell the city’s dollars to prevent a break of the peg.