Hong Kong’s Exchange Rate Stability

Since 1983 the Hong Kong dollar has been linked to the US Dollar at a rate of HKD7.8/USD1.00. The Hong Kong Monetary Authority, through the Currency Board, has maintained this stable exchange rate through a plethora of macroeconomic shocks and against rising prosperity in Hong Kong that could easily justify a significant appreciation against the US Dollar.

While Hong Kong can be hurt by changes in US monetary policy, strong economic growth and a reduction in the rate of inflation has been achieved during the peg’s lifetime.

Hong Kong has unique characteristics including substantial assets with which to defend the peg, but in an age where dogmatic adherence to the idea that floating exchange rates are ultimately the best idea, countries with their act together (i.e. NOT New Zealand) are capable of choosing different tools to maintain exchange rate stability and reduce risk for importers and exporters alike.

Because the fundamentals of Hong Kong are strong, any revaluation of the Hong Kong dollar will see substantial increases in purchasing power for Hong Kong residents and firms with assets denominated in Hong Kong dollars.

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