The Linked Exchange Rate System Between Us $ and Hong Kong $

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University of Tirana
Faculty of Economy Finance Department

The Linked Exchange Rate System Between US $ And Hong Kong $

Prepared by: Accepted by: Eridjola Davidhi Martin Serreqi Olsiana Fekaj

Xhesika Xhuveli

Contents
1.Introduction…………………………………………………………………………………..3 2. A brief history of Hong Kong dollar exchange rate arrangements…………………………...3 3. Why the Link is important to Hong Kong?...............................................................................5 4. Limitations imposed by the Linked Exchange Rate System………………………………….6 5. Alternatives to the Link?............................................................................................................7 5.1. Link to the US dollar but at another rate?...............................................................................7 5.2. Link to another currency?........................................................................................................7 5.3. Link to a basket of currencies?................................................................................................8 5.4 Free float of the Hong Kong dollar?........................................................................................8 6. Conclusion…………………………………………………………………………………….8 References………………………………………………………………………………………..9

1.Introduction
The Hong Kong dollar is officially linked to the US dollar at the rate of 7.8 Hong Kong dollars to one US dollar. This Linked Exchange Rate system,which has been in existence since 17 October 1983, is the cornerstone of Hong Kong’s financial system. The Link ensures that the Hong Kong dollar has a stable external value against major world currencies. This stability plays an important part in supporting Hong Kong’s role as a trading and financial centre. The Link is maintained through a strict and robust Currency Board system, which ensures that Hong Kong’s entire Monetary Base is backed with US dollars at the Linked Exchange Rate. The resources for this backing are kept in Hong Kong’s Exchange Fund, which is among the largest official reserves in the world.This background brief explains the origins, evolution and workings of Hong Kong’s Linked Exchange Rate system. It also examines how important the Link is to Hong Kong’s economy, as well as the limitations that a monetary system of this kind imposes on policy making. 2.A brief history of Hong Kong dollar exchange rate arrangements In 1863 the Hong Kong Government declared the silver dollar – then a kind of international currency – to be the legal tender for Hong Kong, and in 1866 began issuing a Hong Kong version of the silver dollar. The silver standard became the basis of Hong Kong’s monetary system until 1935,when, during a world silver crisis, the Government announced that the Hong Kong dollar would be taken off the silver standard and linked to the pound sterling at the rate of HK$16 to the pound. Under the Currency Ordinance of 1935, banks were required to surrender to the Exchange Fund (which was invested in sterling assets) all silver bullion held by them against their banknote issues in exchange for Certificates of Indebtedness. These Certificates were the legal backing for the notes issued by the note-issuing banks under what became, in effect, a Currency Board system. The note-issuing banks were obliged to purchase the Certificates to back subsequent increases in their note issue with sterling.In June 1972 the British Government decided to float the pound sterling. TheHong Kong dollar was then...
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