Newly redesigned $100 notes lay in stacks at the Bureau of Engraving and Printing on May 20, 2013 in Washington, DC. Photo: Mark Wilson/ Getty Images, AFP

(ATF) A couple of months ago, Texas hedge fund manager and sworn China foe Kyle Bass told the world he was raising a fund to make a 200 times leveraged bet against the Hong Kong currency – in effect, a bet that the HKD peg to the USD would be broken within 18 months’ time.

I commented on it at the time, arguing that this was a lousy bet for any investor to enter into. I have to date seen no reason to change my mind at all and, of course, the HKD did not budge in any significant way in response to the Bass threat.

Even less credible to any sane finance professional is the threat reportedly cooked up by some White House denizens, allegedly at the National Security Council, to break the HKD peg by denying Hong Kong banks and the Hong Kong Monetary Authority (HKMA) access to the US dollar.

In principle, that certainly is doable and denial of dollar access has been practised by the US government against Iran for an extended period of time. 

But Hong Kong is not Iran when it comes to global status as a financial center.

A move by the US government in the direction of attempting to break the peg would not only be up against the $440 billion in HKMA reserves, but also the potential Chinese backing of the HKMA by whatever portion of the over $3 trillion in foreign reserves owned by the Chinese central bank.

More importantly, denying use of the USD on a large scale in a global financial center would amount to a Pyrrhic victory at best. It would have major ripple effects everywhere – would greatly reduce US dollar demand and would, like nothing else, seriously undermine, indeed kill, the US dollar’s status as the global reserve currency.

Were anything of this nature attempted now when the US dollar is already in serious decline (from 103 on the dollar index, DXY, in late March to 93.50 at present), then the caution issued by Goldman Sachs on Tuesday that continued decline puts the dollar in danger of losing its reserve status would rapidly become reality.

Today, a similar point was made by the CEO of Standard Chartered Bank Bill Withers, who said that the Hong Kong dollar’s peg to the greenback is “unassailable” even though the US has threatened action against China for imposing a national security law on the Hong Kong SAR of China.

At this writing, 7:30pm HK time, the HK dollar trades at 7.7501 to the US dollar, flush up against the upper limit of the 7.75 – 7.85 trading range allowed by the currency board arrangement.

The mainland Chinese currency, meanwhile, trades at 7.0022 to the USD, virtually unchanged for the trading day.

There isn’t much of a chink in the HKD’s armour.

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This report appeared first on Asia Times Financial.

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