Local interest rates would then rise to punitive levels, banks would come under intolerable strain, and the link between the American dollar and Hong Kong's dollar would be in jeopardy.
Japanese stocks climbed for the seventh successive session on Friday, reaching a fresh multiyear high, as the yen fell against the U.S. dollar, while Hong Kong and Australian markets rose after trade figures kicked off China's monthly economic data.
That is not so easy for Hong Kong, which cannot lower costs through a depreciating currency because the Hong Kong dollar is pegged to the greenback.
It could be the Hong Kong Bank of China, a private commercial bank, which is already issuing dollar-linked banknotes in Hong Kong, which circulate alongside banknotes from the government and other private banks.
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If the Chinese government devalued the yuan, the consequences for Hong Kong would be severe, calling into question China's commitment to the Hong Kong dollar peg.
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Third, there is the obvious irony that the Hong Kong dollar remains pegged to the U.S. dollar and even after 30 years, including the turbulent Asian currency crisis of the late 1990s, the Hong Kong Monetary Authority is reluctant to embrace a more logical tie to the yuan.
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In principle, of course, there was no reason for this to affect the Hong Kong dollar.
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No doubt, billion-dollar projects like Disneyland Hong Kong will do wonders for the territory's prestige and promotions.
There has been no major assault on the Hong Kong dollar since, and interest rates have receded.
This does not mean that either the Hong Kong dollar or the yuan are out of the woods.
The Hong Kong dollar is basically pegged to the dollar, making it the most expensive city in China.
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The Hong Kong dollar's peg would probably give way, too, leading to another round of competitive devaluations across the region.
Meanwhile, interest rates jacked up to defend the Hong Kong dollar sent foreign pension fund managers rushing for the exits.
Since the Hong Kong dollar is pegged to its U.S. counterpart, interest rates in the two jurisdictions historically have been much closer together.
The Hong Kong dollar is kept pegged to the U.S. dollar, a recipe for distortion of economic activity in the current hot-and-cold international climate.
In early August, hedge funds had sold index-linked futures contracts while attacking the Hong Kong dollar in a bid to force interest rates up.
Those that are fixed by governments notably the Hong Kong dollar and the Chinese yuan have simply drawn greater speculation about the effect of future speculation.
After big depreciations in other Asian countries, it is the fear that the Hong Kong dollar is now overvalued that triggered much of the current panic.
The territory's Basic Law constitution stipulates that the Hong Kong dollar is the SAR's legal tender, but there is nothing that prevents the U.S. greenback from circulating side-by-side.
The ideal scenario: the yen stabilizing at current levels, the renminbi and the Hong Kong dollar holding firm, and Wall Street and Europe coming in for a soft landing.
Speculative hedge funds - "crocodiles, " Tsang calls them - had attacked the Hong Kong dollar's peg to the U.S. greenback several times since the start of the Asian Financial Crisis.
Indeed, the territory's financial secretary, Antony Leung, gave warning that the Hong Kong dollar's longstanding peg to the American dollar might come under strain if the SARS outbreak is not resolved soon.
Famous US investor Paul Tudor Jones has argued in a recent letter to investors that the US government should force a de-pegging of the RMB and Hong Kong dollar from the US dollar.
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Financial markets shared Wall Street's relief that Brazil was not digging in for a protracted battle over its currency, and there was no sign of a speculative attack against the Hong Kong dollar.
"The two biggest risks would be a 'meltdown' in Japan and a depreciation in the Hong Kong dollar or renminbi sparking off a further round of devaluations, " says Alan Brown of State Street Global Advisors in London.
On August 15th the Hong Kong Monetary Authority pushed interbank rates up to levels not seen since the Mexican peso crisis in 1995, to counter what it said was a speculative attack on the Hong Kong dollar.
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