Local government intervenes in financial sector to curb domestic currency's surge
HONG KONG: On a Saturday in May 2025, Hong Kong's de-facto central bank, the Hong Kong Monetary Authority (HKMA), sold a hefty HK$46.54 billion to the market to stop the local currency from soaring beyond its peg to the U.S. dollar. This marks the first such intervention in more than four years.
The Hong Kong dollar is stabilized within a tight band of 7.75 to 7.85 per U.S. dollar. The HKMA stepped in when the Hong Kong dollar neared the strong side of that currency convertibility range. Interestingly, the last time they sold Hong Kong dollars to defend the peg was back in October 2020.
According to Gary Ng, senior economist at Natixis, capital inflows aren't necessarily a problem for Hong Kong as they cause the Hong Kong dollar to get stronger.
The HKMA's intervention led to an increase in the aggregate balance, the key gauge of cash in the banking system, to HK$91.31 billion on May 7, as reported by an HKMA spokeswoman.
($1 = 7.7500 Hong Kong dollars)
This intervention in 2025 stands out as it represents the first time since 2020 that the HKMA has had to intervene to defend the peg on the strong side of the trading band rather than the weak side. This shift could be due to anticipated Federal Reserve rate cuts, which prompted capital inflows into Hong Kong, necessitating active management of liquidity to maintain the peg.
Moreover, it's important to note that this intervention occurred alongside a currency interference in Taiwan on May 2, 2025, where the Taiwan dollar surged 3% against the USD.
In conclusion, the HKMA's intervention in 2025 demonstrates the challenges of maintaining a currency board system amid diverging monetary policies between Hong Kong (pegged to USD) and the Federal Reserve. This proactive measure is designed to prevent exchange-rate-driven financial instability.
The first time since October 2020 that the Hong Kong Monetary Authority (HKMA) needed to intervene to defend the peg on the strong side of the trading band occurred in May 2025. The increase in capital inflows, potentially due to anticipated Federal Reserve rate cuts, caused the Hong Kong dollar to strengthen, necessitating the HKMA's action. This intervention underscores the challenges of maintaining a currency board system amid divergent monetary policies between Hong Kong (pegged to USD) and the Federal Reserve.
