‘The idea sounds relatively ludicrous’...Why currency analysts don’t believe Trump administration will pursue a proposal to undermine Hong Kong dollar peg Currencies

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An apparent trial balloon is coming under heavy fire.

Currency analysts and economists appeared downright skeptical Wednesday that U.S. officials would follow through on a plan that, according to a report by Bloomberg News , would see Washington attempt to undermine the peg between the Hong Kong dollar and its U.S. counterpart.

“The idea sounds relatively ludicrous to me as an attack on the USD/HKD peg would only hurt the Hong Kong financial system which includes U.S. and other nation’s banks,” wrote Brad Bechtel, global head of FX at Jefferies, in a note.

The Bloomberg report said that the idea of striking against the Hong Kong currency’s peg to the U.S. dollar, possibly by limiting the ability of Hong Kong banks to buy U.S. dollars, was raised as part of broader discussions by advisers to Secretary of State Mike Pompeo. The U.S. and other Western nations have rebuked China for passage of sweeping national-security laws on Hong Kong that will undermine the territory’s autonomy as Beijing attempts to crack down on pro-democracy protests.

The report said the measure hadn’t been passed on to senior White House officials, indicating that it hadn’t yet gained much traction. Bloomberg reported that the proposal faced stiff opposition from some officials who feared it would only hurt Hong Kong banks and the U.S., rather than China.

Hong Kong has pegged its currency to the U.S. dollar since 1983. A peg is a policy in which a government sets a fixed exchange rate for its currency versus a foreign currency. To maintain the peg, which requires the Hong Kong dollar /zigman2/quotes/210562005/realtime/sampled USDHKD 0.0000% to trade in a range between 7.75 and 7.85 to the U.S. dollar, Hong Kong echoes the U.S. Federal Reserve’s monetary policy moves. The Hong Kong Monetary Authority buys or sells Hong Kong dollars versus the U.S. currency as needed to keep the exchange rate in the band.

Some analysts argued that the proposed move would only serve to push China to accelerate efforts to insulate itself from attempts by the U.S. to use the U.S. dollar as a weapon to punish Beijing:

Analysts also warned that such a move could send a chilling signal to other countries that peg their currencies to the U.S. dollar, potentially creating turmoil in global markets and undermining the greenback’s global role, which carries significant benefits for the U.S.

“The U.S. targeting the HKD wouldn’t be without risks. It could backfire on the dollar as a reliable reserve currency. Depending on the result, other countries might even voluntarily drop their dollar pegs,” said Jasper Lawler, head of research at London Capital Group, in a note.

Markets appeared to take the news in stride on Wednesday. The Hong Kong dollar was little changed at 7.7502 to the U.S. dollar, while the Hang Seng /zigman2/quotes/210598030/delayed HK:HSI -1.09% ended 0.6% higher. The prospect of escalating U.S.-China tensions weren’t much of a drag on U.S. equities either, with the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.54% up 0.1% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.11% around 35 points lower, or 0.1%.

Shares of banking giant HSBC Holdings PLC /zigman2/quotes/208272822/composite HSBC -0.80% /zigman2/quotes/203901799/delayed UK:HSBA 0.00% took a hit, however, falling 2.8% in London. The bank has a large presence in Hong Kong.