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Recent reports suggest that the Trump administration has been mulling to revoke the USD-HKG peg and reduce the supply of U.S. dollar to Hong Kong after China forcefully imposed a national security law in June.
The U.S-China economic war has now moved to Hong Kong. Last Friday, the Hong Kong dollar saw its biggest ever drop since mid-June, when Beijing imposed the “National Security Law” in the democratic city.
Beijing’s attempt to take Asia’s financial center under its control before the stipulated period is seen as an act of unwarranted aggression from China, and has been despised by several democratic countries, especially the United States.
As per the Bloomberg report last week, the Trump administration was reportedly considering a proposed strike on the Hong-Kong-Dollar peg. Almost over the last four decades since 1983, the HKG has been pegged to the USD. The Hong Kong Monetary Authority thus has kept the HKG rate in a tight band of $7.75 to $7.85 per USD.
Reports suggested that the Donald Trump administration can wage an economic strike against China through undermining the peg and limiting Honk Kong bank’s ability to purchase the USD. The advisors to the Secretary of State Mike Pompeo suggested using sanctions and foreign exchange markets as attack tools.
Traders are closely watching the Hong Kong Dollar movements while worrying about Hong Kong’s future as a financial hub. Ken Cheung, chief Asian currency strategist at Mizuho Bank Ltd, told Bloomberg:
“The depreciation might be an early sign of concerns over the U.S.’s financial sanctions as supportive factors such as large listings and dividend payments may start to cool down later in July. The narrower rate spread with the greenback is also hurting the Hong Kong dollar, which may stay away from the strong end and weaken to 7.7550 in the near term.”
This is concerning as several foreign private players and banks will consider moving out of Hong Kong.
Analysts Say the U.S. Won’t Act Unilaterally
While the U.S. might be mulling for a strong economic action attacking the Hong Kong dollar, it’s easier said than done! Analysts from the financial space say that the U.S. won’t do much to hurt the HKG peg.
Analysts at the asset management company Amundi wrote that even if the U.S. takes strong actions, HKG is well poised to defend its position. The analysts said:
“It is … worth noting that Hong Kong has the autonomy to design its monetary regime, including exchange rate policy.”
The analysts added that if the U.S. limits Hong Kong’s ability to buy the dollars, China will come to the backing. China currently holds more than $440 billion in dollar-denominated foreign currency reserves. This is double the size of Hong Kong’s entire monetary base. China has currently the world’s largest foreign exchange reserves of over $3 trillion. ANZ’s Yeung wrote:
“Hong Kong and China’s central government are prepared for this. Hong Kong’s Financial Secretary Paul Chan has stated that even if the US takes measures to make Hong Kong dollar settlement inconvenient, the government has a contingency plan.”
Moreover, global analysts say that this strong action from the Trump administration will result in a snowball effect which can overturn the global financial markets. This will also hurt Washington’s interests as a matter of fact.