The trend of the Hong Kong dollar to New Taiwan dollar exchange rate has recently been a quite interesting topic. I notice that as economic and trade exchanges between the two regions become increasingly close, the impact on currency exchange rates is also becoming more apparent. According to statistics, Hong Kong has already become the largest source of inbound travelers to Taiwan in 2023, reflecting the importance of the Hong Kong dollar and the New Taiwan dollar in actual commercial activities.

To understand the trend of the Hong Kong dollar against the Taiwan dollar, we first need to look at the special characteristics of the Hong Kong dollar itself. The Hong Kong dollar has existed since 1841, undergoing various monetary system evolutions. The most crucial point is 1983, when Hong Kong officially implemented the linked exchange rate system, fixing the Hong Kong dollar within a range of 7.8 HKD to 1 USD. This mechanism has been maintained until now, meaning the Hong Kong dollar essentially follows the US dollar.

In the long term, the HKD/TWD exchange rate has fluctuated roughly between 3.5 and 4.5 over the years, showing an overall downward trend. It briefly rose above 4.5 in early 2009, and by January 2022, it fell to around 3.5. Afterward, it rebounded for a period but was always resisted around 4.15.

At the beginning of 2024, US CPI and PPI data exceeded expectations, reigniting concerns about inflation, and the dollar strengthened accordingly. Meanwhile, political changes in Taiwan added to investor doubts, putting pressure on the New Taiwan dollar. As a result, the HKD/TWD rate rebounded from 3.905 to 4.05.

Looking at future trends, there are two key factors. First, the US Federal Reserve will eventually enter a rate-cutting cycle unless there is a significant inflation shock. Historically, each rate-cutting cycle has led to a decline in the HKD/TWD rate—9.88% in 2008 and 13.17% in 2019. Based on this logic, if it drops 10% from the high of 4.15, the target would be around 3.735.

The other possibility is that if the US economy remains strong or geopolitical factors push up oil prices, triggering inflation rebounds, the Fed may need to maintain high interest rates or even tighten policies further. In this case, the HKD/TWD rate would rise, with the first target near the previous high of 4.15.

The factors influencing this exchange rate are essentially these few. The most important is US interest rates, because the HKD is pegged to the USD, so dollar appreciation or depreciation directly affects the HKD. Next is Taiwan’s economic situation— in 2021, Taiwan’s economy grew by a high of 6.1%, and during that time, the TWD strengthened while the HKD/TWD rate fell to 3.5. But starting in 2022, Taiwan’s economy noticeably slowed, and the TWD depreciated, causing the HKD/TWD rate to rise to around 4.15. Cross-strait relations and political factors like elections also influence capital flows and economic outlooks. Lastly, global economic conditions matter—rising risks tend to boost risk aversion, pushing up the USD and HKD.

A common question is whether the HKD will detach from the USD peg. Theoretically, this idea isn’t unfounded—after the 1998 Asian financial crisis, other countries recovered their economies through currency devaluation. But in reality, after many years of financial and political turbulence, the HKD has maintained its linked exchange rate mechanism. Unless a crisis of the level of US sanctions or war occurs, this system should remain stable.

Simply put, if we look at the annual outlook, the probability of entering a US rate-cutting cycle in 2024–2025 is high, and the HKD/TWD is likely to decline. But the specific path depends on key indicators like US monetary policy, Taiwan’s economic data, and the global economic situation.