Currency

The Hong Kong dollar has been previously linked to the Pound Sterling. In 1971, the Hong Kong dollar was then pegged to the US dollar with a fluctuation limit, after the Sterling area was liquidated. This regime was later changed into a controlled, floating basis, then returning once again to being pegged to the US dollar again in 1983. The purpose for adopting this peg was to prevent the Hong Kong dollar from collapsing amidst a political row between China and the United Kingdom over the future of the city. Ever since 1983, H.K. has adopted a Currency Board Arrangement to fix the exchange rate at HK$7.8 per US dollar. 

The Hong Kong Dollar operates under a currency board system. A prerequisite for a bank to be able to issue the Hong Kong dollar is that it must have the equivalent exchange in US dollars on deposit. This system 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. 

As of 2005, in addition to a lower guaranteed limit, a new upper guaranteed limit was set for the Hong Kong dollar at HK$7.75 to the USD. The lower limit was lowered from 7.80 to 7.85 in five weeks, by 100 pips each week. The move was made to narrow the gap between the interest rates in Hong Kong and those of the United States. A further aim of allowing the Hong Kong dollar to trade in a range is to avoid the Hong Kong dollar being used as a proxy for speculative bets on a Yuan revaluation.