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USD/HKD: How long can the Hong Kong dollar peg hold?

By:
on Oct 14, 2022
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  • The USD/HKD price has remained in a consolidation phase in the past few days.
  • The US dollar index has surged to the highest level in over 20 years.
  • The Hong Kong dollar peg will last even as the dollar strength continues.

The USD/HKD price has been in a consolidation phase at the upper side of its peg in the past few months. It has remained at 7.85, which is about 1.30% above its pandemic low of 7.750. So, how long will the Hong Kong dollar peg last as the US dollar index surges?

USD/HKD

Hong Kong dollar peg

The US dollar index (DXY) has been in a strong bullish trend this year and is sitting close to its highest level in more than 20 years. In this period, it has surged against most currencies, including the Chinese yuan, euro, and British pound.

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The US dollar surged because of its role as a safe haven as global risks rise. Also, it has jumped because of the most important forex news of the year in that the Federal Reserve has hiked rates by 300 basis points. 

The Hong Kong dollar has remained relatively steady at the lower side of its range against the US dollar because of its peg. This peg means that the HKD must remain between 7.75 and 7.85 against the US dollar. This is one of the main reasons why Hong Kong has become a preferred destination for international investors.

The Hong Kong Market Authority (HKMA) ensures that the peg remains intact by intervening in the market. It does that by mirroring the actions of the Federal Reserve. As such, the authority has hiked interest rates in line with the Fed’s actions.

It also does that by making market interventions. For example, between May and August, the HKMA had purchased HK$208.6 billion of local currency. As a result, it halved the aggregate balance of the currency in the financial system to H$129 billion.

Can the HKD peg last

The US dollar index has surged since then, meaning that the bank has increased its purchases. As such, some analysts worry whether the Hong Kong dollar peg will hold steady if the US dollar continued its rise.

Bets against the Hong Kong dollar peg have burned many investors in the past. One of those who have bet against the peg in the past is Kyle Bass, who runned Hyman Capital. Others who have a short on the currency are Lazard and Pimco.

Still, analysts believe that the Hong Kong dollar peg will last since Hong Kong has a large foreign exchange reserve of over $419 billion. It can use these funds to defend the HKD even as the US dollar spikes.

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