China | Will Hong Kong forgo the US currency peg amid the Trump 2.0?

Summary

Amid fears of escalating US-China tensions in Trump 2.0, questions about Hong Kong's USD peg have emerged. The HKMA remains committed, supported by strong reserves and political backing. While abandoning the peg is unlikely short-term, external shocks and geopolitical shifts highlight the need for long-term alternatives.

Key points

• Key points:
• Concerns about the sustainability of the HKD's currency peg are rising due to: i) A stable HKD and prolonged high interest rates could increase economic vulnerability; ii) Geopolitical tensions; and iii) HK's close ties with the RMB business.
• Despite market concerns, maintaining the HKD peg has had more pros than cons over the past four decades. It is not the right time to change the currency peg amid economic uncertainty.
• The Hong Kong Monetary Authority, the de facto central bank of Hong Kong, remains committed to maintaining the currency peg, and HK still has enough ammunition to defend it.
• While alternatives like pegging to the RMB or a basket of currencies exist, the benefits of the USD peg outweigh the risks in the short term.
• However, while the peg has served as a cornerstone of Hong Kong’s financial system, ongoing geopolitical developments warrant continuous evaluation of alternative strategies for long-term sustainability.

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