Sky-high rates will hold peg, says creator

Hong Kong is willing to tolerate sky-high borrowing rates and near term economic pain to defend its currency peg with the dollar in the wake of renewed attacks by speculators.

"They would be willing to let Hong Kong dollar rates to rise to whatever level necessary to maintain the fixed exchange rates," said John Greenwood, the architect behind the currency board mechanism created in 1983. "There's a cost, but the dislocation caused by a fluctuating currency would have much bigger impact on domestic prices, import costs, and capital markets."

Hedge fund titans Bill Ackman and Boaz Weinstein are shorting the currency to test and profit from that pain threshold.

While financial conditions appear ripe for bears to emerge, those speculators underestimate the Hong Kong Monetary Authority's willingness to preserve the peg, Greenwood said.