- Linked exchange rate
A linked exchange rate system is a type of
exchange rate regimeto link the exchange rate of a currencyto another. It is the exchange rate system implemented in Hong Kongto stabilise the exchange rate between the Hong Kong dollar(HKD) and the United States dollar(USD). The Macao pataca(MOP) is similarly linked to the Hong Kong dollar.
fixed exchange ratesystem, the government or central bankdoes 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.
As a response to the Black Saturday crisis in
1983, the linked exchange rate system was adopted in Hong Kongon October 17, 1983through the currency board system [Jao YC.  (2001). The Asian Financial Crisis and the Ordeal of Hong Kong. Quorum, Greenwood. ISBN 1567204473] . The redemption of certificates of indebtedness(for backing the banknotes) were sent out by note-issuing banks to peg the domestic currency against the US dollar at an internal fixed rate of HKD $7.80 = USD $1 [ [http://www.info.gov.hk/hkma/gdbook/eng/l/link_exch_rate_sys.htm Linked Exchange Rate System] at Hong Kong government website] .
Hong Kong Monetary Authority(HKMA), Hong Kong's "de facto" central bank, authorised note-issuing banks are to issue banknotes. These banks are required to have the same amount of USDto issue banknotes. The HKMA guarantees to exchange USDinto 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 as an upper limit and 7.75 as a lower limit 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 at (or extremely close) the lower limit and upper limit respectively. 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.
Notes and references
* [http://www.info.gov.hk/hkma/eng/currency/link_ex/index.htm Linked Exchange Rate System] at Hong Kong Monetary Authority (HKMA)
* [http://forexonlinelearning.com/index.php Linked Exchange] information and tools.
* [http://www.amcm.gov.mo/publication/quarterly/Apr/Financial_EN.pdf] , p.22
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