The Linked Exchange Rate System (LERS) is the monetary arrangement under which the Hong Kong dollar is tied to the US dollar. It was adopted on 17 October 1983 at a rate of HK$7.80 per US dollar, and since May 2005 the market rate has been held inside a band from HK$7.75 to HK$7.85. The Hong Kong Monetary Authority (HKMA), set up in 1993, runs the system and treats exchange-rate stability as its primary monetary objective.
The LERS is a currency board, not an ordinary currency peg. The difference is the rulebook: every Hong Kong dollar in the monetary base must be backed by US dollar assets at a fixed rate, and money is created or withdrawn only when US dollars come in or go out. Interest rates are left to adjust on their own, with no discretionary policy rate aimed at domestic goals.
The Linked Exchange Rate System in plain terms
Imagine a token booth at a fairground that will always swap tokens for dollars at the same price, and keeps a dollar in its safe for every token in circulation. Nobody needs to worry about the token losing value, because the booth can always buy every token back. The booth does not decide how many tokens exist; visitors do, by buying or returning them.
Hong Kong works much the same way. Banks can always swap Hong Kong dollars for US dollars with the HKMA at the edges of a narrow price range. If money floods in, the HKMA issues more Hong Kong dollars and buys the incoming US dollars; if money leaves, it buys Hong Kong dollars back and pays out US dollars. The cost of this simplicity is that Hong Kong's interest rates largely follow those set in Washington.
History
Hong Kong had already tried several regimes. It used a silver standard from 1863, linked to sterling from December 1935, pegged to the US dollar at HK$5.65 in July 1972 and floated in November 1974, after the Bretton Woods system broke down. The float ended in crisis. Uncertainty during the Sino-British talks on Hong Kong's future drove the currency to a record low on "Black Saturday", 24 September 1983, amid panic buying of US dollars and basic goods.
The government responded with the link at HK$7.80. For its first fifteen years the link relied mainly on arbitrage by banks around the note-issue rate, without an explicit HKMA promise to convert bank balances. After speculative attacks in the Asian financial crisis of 1997 and 1998, when overnight interbank rates spiked in October 1997 and the government bought local shares in August 1998 to counter speculators, the HKMA added technical measures, including a formal convertibility undertaking. The refinements of 18 May 2005 introduced a strong-side undertaking at 7.75, moved the weak side from 7.80 to 7.85 and created the current band.
How the currency board works
The mechanism rests on a few features:
- Full backing. The monetary base is fully backed by US dollar assets held in the Exchange Fund, and any change in the base is matched by an equal change in those assets at the fixed rate.
- Note issue. Three commercial banks, HSBC, Standard Chartered and Bank of China (Hong Kong), issue most banknotes, and must hand US dollars to the Exchange Fund at HK$7.80 for certificates of indebtedness before they can issue them.
- Convertibility undertakings. The HKMA stands ready to sell Hong Kong dollars to banks at 7.75 per US dollar and to buy them at 7.85. Between the two limits, the Convertibility Zone, it may act but is not obliged to.
- Automatic interest rate adjustment. When the HKMA buys or sells at the limits, the Aggregate Balance, the banks' clearing balances with it, shrinks or grows, pushing local interest rates up or down until the flow reverses.
Both limits are used. The weak-side undertaking was triggered repeatedly in 2022 and 2023 as US rates rose, and the strong side was triggered four times in early May 2025, when the HKMA sold a total of HK$129.4 billion. From late June 2025 the flow reversed and the weak side was triggered again.
The link and the impossible trinity
The impossible trinity says a country cannot have a fixed exchange rate, free movement of capital and its own interest-rate policy all at once. Hong Kong keeps the first two and gives up the third. With high capital mobility, any lasting gap between Hong Kong and US rates would draw money in or out until the gap closed, so monetary policy independence is the price of the link. The band itself is narrow, about 0.64% either side of 7.80, which makes the LERS a very tight exchange-rate band.
The large stock of foreign exchange reserves behind the Exchange Fund, which exceed the monetary base, gives the commitment credibility. The gap between local and US rates also creates carry trade flows, which are a common reason the rate drifts to one edge of the band.
Criticism and debate
Critics note that Hong Kong imports US monetary policy even when its own economy, increasingly tied to mainland China, needs something different. Low US rates after 2008 fed a property boom, while high US rates in 2022 and 2023 tightened conditions during a weak recovery. Deflation and falling wages after 1998 were also blamed partly on the link. Proposals to peg to the renminbi or to a basket have been raised from time to time, but the government and the HKMA have repeatedly said they have no plan to change the system, arguing that its simplicity and long record are its main strength.