A milestone of sorts was reached this month when the dollar hit a multiyear low on a trade-weighted basis and set record lows against Asian currencies, led by the Singapore dollar.
The drop in the dollar was especially remarkable because it took place against a backdrop of geopolitical uncertainty, which usually triggers a flight to haven currencies – which in the past would have meant a rush to the dollar. Meanwhile, the currency of the special administrative region of Hong Kong moved not at all. But that is because the Hong Kong dollar is pegged to the US dollar, not because the people of Hong Kong are enamoured with it. Indeed, Hong Kong citizens are increasingly turning their backs on the US dollar and momentum is growing to reject the dollar peg.
That momentum comes from the people of Hong Kong, but it has support from respected economists, including some at multinational organisations such as the Bank for International Settlements. Hong Kong, of course, hardly matters in the larger scheme of things. But it has a powerful demonstration effect. If Hong Kong abandons the dollar peg, it is likely others will follow – particularly in the Gulf. Kuwait has already depegged from the dollar and others are likely to follow suit.