Currencies | Questions over dollar peg will fade, says FX strategist

A foreign-exchange strategist has said that talk of Hong Kong abandoning its currency peg to the U.S. dollar missed the broader point: the economic rise of China will one day dwarf the local currency, making its relationship with the U.S. irrelevant.
The city’s political unrest in recent months has helped spur interest among hedge funds in bets against the Hong Kong dollar, which has been kept in a tight range against the greenback since 1983.
They see capital flight eventually forcing the city’s government to dump its currency policy. The monetary authority has already pumped billions of Hong Kong dollars into defending the peg since the start of the year.
The Hong Kong dollar is pegged to the U.S. dollar in a band that ranges between 7.75 and 7.85 to the U.S. dollar. In turn, Macau’s pataca is fixed to the Hong Kong dollar at an exchange rate of 1.03.
As the Hong Kong dollar is pegged to the greenback, both special administrative regions essentially import U.S. monetary policy, though local banks aren’t obliged to follow with lower retail costs.
The potential for the yuan to become a global currency one day has long cast doubt over the future of these currency relationships. However, such debate will prove irrelevant in time, according to foreign-exchange veteran Stephen Jen.
On the one hand, the city is bound to see the peg as an important symbol amid questions about its ability to govern itself, Jen told Bloomberg. And on the other, if it does integrate more tightly with mainland China, the resultant increase in use of the yuan in the city would make the Hong Kong dollar peg a side issue.
“I do not believe the Hong Kong dollar peg will be broken, because the logic for its durability is very different from the conventional Western thoughts,” Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital, wrote in a note Monday. “If indeed Hong Kong converges further toward China, both in terms of the real economy and the financial system, the yuan should in theory become the dominant” tender, marginalizing the Hong Kong dollar, he wrote.
Jen, who previously worked at the International Monetary Fund, takes the opposite view.
“I would say that BECAUSE of the heightened political tensions with China, it would be next to impossible for Hong Kong to abandon an important symbol of autonomy,” he wrote. DB/Bloomberg

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