United States dollars. Photo: AFP/Herika Martinez

White House aides are considering undermining the Hong Kong dollar’s peg to the greenback as part of efforts to punish China over its new security law in the city, a report said Wednesday.

Bloomberg News said the idea from some officials to put a strain on the 37-year-old peg – possibly by limiting local banks’ access to US dollars – was one of a number of measures flagged as Washington looks at ways to respond to the controversial law.

However, it cited unnamed sources as saying the move had not been discussed at senior levels of the Trump administration, while analysts said such a measure was unlikely owing to the upheaval it would cause to global markets.

Other measures being discussed included canceling a US-Hong Kong extradition treaty and no longer cooperating with the city’s police force, Bloomberg said.

The city’s dollar was linked to the greenback in 1983 in a bid to prevent a sell-off as it wobbled over fears about China’s reunification talks with Britain.

Under the city’s Linked Exchange Rate System, the HKMA is required to maintain the local currency around HK$7.8 to US$1 to ensure exchange rate stability.

The Hong Kong Monetary Authority, the de facto central bank, has in recent months had to sell billions worth of local dollars to maintain that link, as cash floods into the city to take advantage of its relatively high interest rates.

Investors have also been rushing to join a string of big-ticket new listings of late, including Chinese e-commerce giant JD.com and tech firm Netease.

The currency remained wedged at HK$7.75 Wednesday, its strongest possible level.

Still, Stephen Innes at AxiCorp said the US was unlikely to do anything to hurt the peg as, firstly, it could put at risk the vast amount of assets held by China, particularly Treasuries.

“Second, such a move could destabilize dollar pegs elsewhere, including US allies around the world, especially those in the Middle East,” said Innes. 

“Third, the unthinkable instability that it would trigger in the dollar-based global financial ecosystem could drive a sell-off in US equity markets – an outcome abhorrent to the White House ahead of the November presidential election.”

AFP

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