Forex Comment Jun 02

A Hong Kong dollar peg to the euro instead of the Trump dollar?

Trump’s threats may prove to be bluster but the city’s currency can ill-afford to be saddled to a dollar subject to the erratic whims of the president    

by Uwe Parpart
A Hong Kong dollar peg to the euro instead of the Trump dollar?
Goodbye HKD: President Trump’s comments on China are creating uncertainty for Hong Kong’s currency.

(ATF) Currency and securities markets have begun to inspect more closely US President Donald Trump's threats to "punish" China and to inflict damage to the Chinese economy and have – for now – concluded that his bark is worse than his bite.

Hong Kong, Shanghai and most other Asian stocks are up for the second day running. European stocks are following suit, notably Germany's Dax, which was up 3.40% at 6pm HK time. 

(Note: Germany is another target of Trump ire for building a natural gas pipeline with Russia).

Even US futures are up ... and probably not as a sign of approval for Trump's threat to further militarise US police forces.

As Hong Kong and mainland Chinese securities went, so did the HKD and CNY.

The HKD touched the upper end (7.75) of its trading band with the USD. The PBoC set parity for the yuan on Tuesday morning at 7.1167. By 6pm, CNY was trading considerably stronger at 7.1009 and CNH, the offshore version of CNY, stood at 7.1064. As Hong Kong's Finance Secretary Paul Chan said this morning, there's no evidence of any kind of capital flight.

But while that is so and Hong Kong and the HKD peg to the USD may well survive Trump's antics, China may want to consider taking the HKD off the USD and replace it with a currency not subject to the whims of the US president.

The EUR has been the best-performing major currency of the past several weeks and its stability is underwritten by the world's only major economy with a AAA rating. The US rating, if anything, is likely to tumble further after losing its AAA rating.

Is a HKD move to the EUR from the USD feasible? Sure it is – and if the errant behaviour of Mr Trump continues, it may well become a necessity. Eventually, the HKD will merge with the Chinese RMB. But such a move has to await full yuan convertibility.