By Rae Wee and Jiaxing Li
SINGAPORE/HONG KONG (Reuters) -U.S. President Donald Trump’s erratic policies are rattling a currency peg that has withstood the test of time and is seen as an anchor for China and Asia.
The Hong Kong dollar has whipsawed from one end of its narrow trading band to the other versus the greenback in just a month.
While the latest volatility is not seen as a threat to the four-decade-old peg, the it has had a dramatic impact on interest rates, providing a challenging environment for businesses and investors in the financial hub.
The stress on one of the world’s best-known currency pegs underscores how volatility in the U.S. dollar under Trump is disrupting even the most stable corners of the market.
Interest rates in Hong Kong have tended to move in lockstep with the United States, keeping the Hong Kong dollar – which trades between 7.75 and 7.85 per U.S. dollar – relatively stable.
But they have decoupled over the past month as global investors cooled on U.S. assets and fretted about Washington’s growing debt pile, while massive capital entered Hong Kong as foreigners flocked to blockbuster share offerings. Chinese investors have also ploughed record amounts of money into Hong Kong-listed stocks.
“The pace and speed of inflow was quite surprising,” said Raymond Yeung, ANZ’s chief economist for Greater China.
The volatility forced the Hong Kong Monetary Authority (HKMA), the city’s de-facto central bank, to intervene in the foreign exchange market four times in May as the Hong Kong dollar bumped up against the strong end of its trading band.
That caused borrowing costs in Hong Kong to plunge to record lows, tempting speculators to short-sell the currency and drive it swiftly to 7.85, the weak end of the band.
As Hong Kong rates fell, the gap between U.S. three-month rates and the benchmark in Hong Kong hit a record high last week, based on LSEG data stretching back to 2020. Spreads across other tenors similarly widened.
Analysts say it is normal to see an occasional deviation in rates between the Hong Kong dollar and U.S. dollar, but the abrupt moves seen in recent weeks are worrisome for businesses and investors – especially given disruptions to global trade and other uncertainty.
“If the gap closes abruptly, then firms and households and the financial system in Hong Kong might suffer from a large interest rate shock, which is not good for financial stability,” ANZ’s Yeung said.
Hong Kong officials have sought to reassure markets that the peg is here to stay, and that despite the increased volatility, there are some benefits to the current low level of rates.
