In an address to the Hong Kong Institute of Bankers later posted on the HKMA Web site, Mr Yam said no exchange rate system was perfect but critics of the limitations imposed by the peg needed to answer a key question:

"It is - are these limitations so severe, so constricting, so damaging as to outweigh the advantages that the link brings to Hong Kong, or to outweigh the risks and uncertainties that would inevitably arise if we were to change or abandon the link? I think that the answer has to be no," he said.

The peg, which has been in place for almost 20 years, fixes the currency at HK$7.78 to US$1. The authorities have had to defend it from time to time in the past - during the 1998 Asian crisis the government spent nearly HK$120bn to support it.

Yesterday's unequivocal statements of support seem to have quelled speculation: the Hong Kong dollar one-year forward yesterday traded at a 100- to 120-basis point premium to the spot rate, against a 300-basis point premium late last week when rumours were at their height.

Mr Yam said that the HKMA was under no illusions about the limitations imposed by the link, and agreed that the system ruled out using the exchange rate to adjust more quickly to sudden shocks. It was also true that it tied Hong Kong to US monetary policy at times when their economic cycles might not be synchronised and that it was a cause of asset price inflation in the 1990s and more recently deflation.

On the challenge of competitiveness, however, while the nominal exchange rate was relevant, the real effective exchange rate (Reer) - which takes into account inflation rates and trade patterns - was more relevant to measuring competitiveness. On this measure, Hong Kong's currency was delivering competitive gains, Mr Yam said: "The Reer for the Hong Kong dollar has depreciated by around 13 per cent since the crisis period in 1998. During the same period, the Reers for Asian currencies have appreciated by various degrees, reflecting both a rein on nominal exchange rates as well as higher domestic inflation."

In the best of times, de-pegging the currency could lead to uncertainty and instability, Mr Yam said, "If, heaven forbid, de-pegging were to be carried out in the conditions that we have now, then we might add a third word to uncertainty and instability: catastrophe. At this time of great global uncertainty and local distress, our efforts should be directed towards building stability, not destroying or undermining it."