Linked exchange rate

From Freepedia

A linked exchange rate system is a type of exchange rate regime to link the exchange rate of a currency to another.

Unlike a fixed exchange rate system, the government or the central bank does not actively interfere in the foreign exchange market by controlling supply and demand of the currency, in order to influence the exchange rate. The exchange rate is stabilised by a mechanism.

In the case of Hong Kong, the Hong Kong dollar is linked to the US dollar at HKD 7.80 / USD since October 17, 1983 through the currency board system. The Hong Kong Monetary Authority (HKMA), Hong Kong's de facto central bank, authorised note-issuing banks to issue banknotes. These banks are required to have the same amount of US dollars to issue banknotes. The HKMA guarantees to exchange USD into HKD, or vice versa, at the rate of 7.80. When the market rate is below 7.80, the banks will convert USD for HKD from the HKMA, HKD supply will be increased, and the market rate will climb back to 7.80. The same mechanism also works when the market rate is above 7.80, and the banks will convert HKD for USD. In practice, the HKMA also set a lower limit at 7.80 (7.85 and an upper limit at 7.75 since May 18, 2005) for the HKD to flow within. The HKMA will buy or sell HKD in the market when the exchange rate is beyond the limit(s). The HKD is backed by one of the world's largest foreign exchange reserves, which is several times the amount of money supplied in circulation.

See also

• List of Hong Kong-related topics